A falling market doesn't mean you can't refinance — but it changes what's possible.
When house prices are dropping, many borrowers wonder whether it is still worth refinancing. The answer depends on what you are trying to achieve. If your goal is a lower interest rate or reducing your monthly repayments, refinancing can still make sense. If you want to access equity, a falling market works against you.
Understanding how declining property values affect your equity, your loan-to-value ratio (LVR) and your lender options is the key to making an informed decision. This guide walks you through the pros, cons and key considerations for refinancing when house prices are falling in Australia.
How falling prices affect you
When property values fall, your equity position deteriorates even if you keep making repayments. Equity is the difference between what your home is worth and what you owe. As the value drops, that gap narrows.
For example, if you bought a home for $800,000 with a $640,000 loan, you initially had $160,000 in equity. If the property falls in value by 10% to $720,000 and your loan balance is now $600,000, your equity has dropped to $120,000. If the property falls far enough, you could end up in negative equity, where the outstanding loan exceeds the property’s current value.
Your LVR, which is the loan amount divided by the property value, also increases as prices fall. A higher LVR can affect your interest rate, trigger an LMI requirement and limit which lenders will consider your application.
Reasons to refinance
There are still good reasons to refinance your home loan when prices are falling:
Use our loan repayment calculator to model what a lower rate or shorter term would mean for your monthly repayments before speaking to a broker.
Risks to understand
Refinancing in a falling market also comes with risks you need to be aware of:
If you are unsure whether your current equity position allows you to refinance, read our article on home equity loans to understand how lenders calculate your available equity.
LVR and your costs
Your LVR has a direct impact on the costs and rates you are offered when refinancing. Lenders price their rates based on risk, and a higher LVR means more risk for them.
If your LVR is above 80%, you will typically need to pay Lenders Mortgage Insurance on the refinanced loan. LMI can cost $10,000 or more depending on the loan amount and LVR, which can quickly wipe out any interest saving from switching lenders.
Some lenders do offer refinancing at up to 85% LVR with LMI waived for certain borrower profiles, but the rates available at higher LVRs are generally less competitive. A broker can compare options across the market and identify whether the net benefit of refinancing still works in your favour once all costs are factored in.
If your LVR is currently sitting above 80% due to falling prices, check our borrowing power calculator to understand how much additional equity you would need to bring your LVR down before refinancing becomes cost-effective.
When refinancing makes sense
Refinancing when house prices are falling can still be the right decision in the right circumstances. Here is a simple guide:
Every borrower’s situation is different. What matters is understanding your current LVR, your equity position and what you want to achieve. Speaking with a broker who can assess your full situation is the most reliable way to know whether now is the right time to act.
Common questions
Q: Can I refinance if my property value has dropped?
Yes, in many cases. If you still have at least 20% equity after the price fall, you can likely refinance without significant additional costs. If your equity has dropped below 20%, you may need to pay LMI or accept a higher rate. If you are in negative equity, refinancing to another lender is generally not possible until you rebuild some equity.
Q: What is negative equity and how do I get out of it?
Negative equity means your home loan balance exceeds the current value of your property. To get out of it, you can make extra repayments to reduce the loan balance, wait for property values to recover, or do both. It is an uncomfortable position but does not mean you need to sell, as long as you keep making your repayments.
Q: Will a lender value my property lower than I paid?
Yes. Lenders conduct their own property valuations based on current market conditions, not what you originally paid. In a falling market, this valuation is often lower than the purchase price. That is why your LVR may have increased even if you have been making regular repayments.