How to Refinance if the Value of Your Home Has Dropped

Refinancing your mortgage can be a smart financial move—helping you secure a lower rate, consolidate debt, or access more flexible loan features. But what happens if the value of your property has gone down since you first bought it?

Falling property values can make refinancing more complex, but it doesn’t necessarily mean it’s off the table. Even in 2025, when some Australian property markets are still adjusting after recent price corrections, many homeowners are finding ways to refinance successfully.

This guide will explain what happens when your home value drops, what lenders look at, and what options you have if you want to refinance in a tougher market.

Why Your Home Value Matters When Refinancing

When you refinance, your new lender assesses your application much like they did when you first took out your loan. One of the most important factors is your Loan-to-Value Ratio (LVR), which measures your loan size compared to your property’s value.

If your LVR is 80% or less, you’re in a strong position to refinance.

If your LVR is above 80%, lenders may charge Lenders Mortgage Insurance (LMI) or decline the refinance altogether.

If your property has lost significant value, you may even be in negative equity—where your loan balance is higher than the current property value.

In 2025, with property prices fluctuating across different parts of Australia, many borrowers are finding their equity position isn’t as strong as they’d hoped. That doesn’t mean refinancing is impossible, but it does require a strategic approach.

Step 1: Find Out the Current Value of Your Property

Before you start comparing refinance options, it’s crucial to know exactly what your home is worth today.

Get a professional valuation: Your lender will usually arrange one as part of the refinance process.

Research the market yourself: Look at recent sales in your area on sites like CoreLogic, Domain or Realestate.com.au to get an estimate.

Order an independent appraisal: Some homeowners choose to get a licensed valuer’s report for a clearer picture before applying.

Knowing your property’s market value upfront will help you avoid surprises later in the refinance process.

Step 2: Understand Why You’re Refinancing

Your reason for refinancing will influence your options.

To lower repayments: Even if your property value has dipped, refinancing to a better rate may still be possible if you have sufficient equity.

To consolidate debt: Lenders may be more cautious approving this if your equity is low, but it’s still achievable in some cases.

To switch loan types: For example, moving from a fixed rate to a variable rate (or vice versa). This is often easier than cashing out equity.

To access equity (cash out): This will be harder if your property has dropped in value, since lenders prefer strong equity buffers.

Clarifying your motivation will help your mortgage broker or lender determine whether refinancing is the right move—or if alternatives like a loan restructure or repayment renegotiation make more sense.

Step 3: Speak with Your Current Lender

Sometimes, the easiest option isn’t switching lenders—it’s renegotiating with your existing bank.

If your equity is lower than expected, your current lender may still be open to:

Offering a rate reduction to keep your business.

Waiving fees or providing loyalty discounts.

Allowing you to switch between fixed and variable products.

This won’t technically count as a full refinance, but it can still save you money without triggering a fresh valuation risk.

Step 4: Talk to a Mortgage Broker

If your property’s value has dropped, a mortgage broker is your best ally. Unlike a single bank, a broker has access to multiple lenders—including some who are more flexible with valuations or equity requirements.

A broker can:

Assess your full financial situation.

Identify lenders who may consider your application despite a higher LVR.

Help you compare loan structures to see if refinancing is truly worth it.

Provide strategies for improving your equity position if refinancing isn’t possible right now.

At Micah Finance Solutions, we specialise in helping homeowners navigate complex situations like refinancing with low equity.

Options if Your Home Value Has Dropped

If you’ve discovered that your home is worth less than when you bought it, here are some practical strategies:

1. Refinance with LMI (Lenders Mortgage Insurance)

If your equity has dropped but you’re not in negative equity, some lenders may allow you to refinance by paying LMI again. This adds cost, but can still be worthwhile if the interest rate savings outweigh the insurance premium.

2. Reduce Your Loan Size

If possible, make an additional lump-sum repayment before applying. This lowers your LVR and strengthens your refinance application.

3. Improve Your Overall Financial Position

Lenders don’t just look at property value—they also consider income, expenses, and credit history. Strengthening these areas can offset a weaker property valuation.

4. Consider a Guarantor Loan

In some cases, a family guarantor can help cover the equity shortfall, allowing you to refinance.

5. Wait and Build Equity

If refinancing isn’t viable today, focus on reducing your loan balance and riding out market conditions. Property values can recover over time, improving your LVR naturally.

Refinancing in Negative Equity

If your loan balance is higher than your property’s current value, refinancing to another lender may not be possible.

However, you still have options:

Stay with your current lender: Continue paying down the loan until equity improves.

Request hardship assistance: If repayments are difficult, lenders may offer temporary relief.

Explore restructuring: Switching to interest-only or extending the loan term may reduce pressure until conditions improve.

Negative equity can feel stressful, but it doesn’t last forever. Many Australian homeowners have successfully recovered equity as markets rebounded.

FAQs: Refinancing After a Property Value Drop

Can I refinance with no equity?

It’s very difficult to refinance with no equity, but your current lender may still restructure your loan.

Will a dropped property value affect my credit score?

No—property values themselves don’t impact your credit score. However, declined refinance applications can leave an enquiry on your file.

Is refinancing worth it if I have to pay LMI again?

It depends. Sometimes, the long-term savings on interest outweigh the cost of LMI. A broker can calculate the break-even point for you.

Should I wait until the market recovers?

If you’re not in financial stress, waiting may be the best option. But if refinancing now could save you hundreds per month, it’s worth exploring.

Final Thoughts

Refinancing when your property value has dropped is more challenging, but it’s not impossible. The key is to know your home’s worth, be clear on your goals, and work with experts who can connect you to the right lenders.

At Micah Finance Solutions, we help homeowners across Australia—even in tough situations like low equity or declining property values—find practical solutions that improve their financial wellbeing.