What is the cheapest way to take equity out of your home?

If you own a home in Australia and have built up equity, you might be wondering how to unlock that money without selling your house. The cheapest way isn’t always the most advertised one. It’s not always a reverse mortgage or a home equity line of credit. Sometimes, the best option is the one you’ve never considered - or the one you’ve been told to avoid.

What does "taking equity out" actually mean?

Equity is the part of your home you truly own. If your house is worth $800,000 and you still owe $300,000 on your mortgage, your equity is $500,000. Taking equity out means borrowing against that $500,000 - not selling your house, but using it as collateral for cash.

People do this for many reasons: to pay off high-interest debt, fund home renovations, help family members, or cover medical bills. But not all methods cost the same. Some charge high fees. Others lock you into lifelong payments. A few don’t charge interest at all - until they do.

Option 1: Cash-out refinance - often the cheapest

If you have a good credit score and your home has appreciated, a cash-out refinance might be your best bet. This means replacing your current mortgage with a new, larger one - and pocketing the difference.

For example, if you owe $300,000 on a $800,000 home, you could refinance to a $500,000 loan. You pay off your old mortgage and walk away with $200,000 in cash. The catch? You’re now borrowing more, so your monthly payments might go up - but your interest rate could be lower than your original loan.

Why is this often the cheapest? Because you’re getting a new mortgage rate, not a second loan. In early 2026, fixed-rate mortgages in Australia are hovering around 5.8% for owner-occupiers with 20% equity or more. Compare that to home equity loans, which can run 7% to 9%. Even credit cards are cheaper than some equity products - but only if you pay them off fast.

Pros:

1. Lowest interest rate available for most homeowners
2. One monthly payment instead of two
3. Interest may be tax-deductible if used for home improvements

Cons:

1. Requires good credit and stable income
2. Closing costs: $1,500 to $4,000
3. You’re extending your loan term - you might pay more over time

Option 2: Home equity loan - simple, but not always cheap

A home equity loan is a second mortgage. You keep your original mortgage and take out a separate loan against your equity. It’s usually a lump sum with fixed payments.

It’s easier to qualify for than a cash-out refinance - no need to re-qualify for your whole mortgage. But the interest rate? Higher. In 2026, most Australian banks offer home equity loans at 7.2% to 8.5%. That’s 1.5% to 3% more than a refinance.

Some lenders offer low introductory rates - 5.9% for the first year - but then it jumps. Read the fine print. If you’re only borrowing $50,000 and plan to pay it off in five years, this might still be worth it. But if you’re stretching it over 15 or 20 years, you’ll pay thousands more in interest.

Pros:

1. Fixed payments - easy to budget
2. No need to touch your existing mortgage
3. Can be approved faster than a refinance

Cons:

1. Higher interest than cash-out refinance
2. Two monthly payments
3. Some lenders charge early repayment fees

Option 3: Home equity line of credit (HELOC) - flexible, but risky

A HELOC works like a credit card secured by your home. You get a credit limit - say $100,000 - and you borrow only what you need, when you need it. Interest only accrues on the amount you’ve used.

It sounds great, right? But here’s the catch: HELOCs in Australia are mostly variable rate. And in 2026, rates are averaging 8.1%. Plus, many have a 10-year draw period, then a 10-year repayment period. That means after 10 years, your payments could double or triple as you start paying off principal.

Some people use HELOCs to pay off credit cards. That’s smart - if you pay it off in 2 years. But if you treat it like free money? You’ll end up deeper in debt. The Reserve Bank of Australia flagged HELOC misuse as a growing risk in late 2025.

Pros:

1. Pay interest only on what you use
2. Good for unpredictable expenses - like medical bills or home repairs

Cons:

1. Variable rates can spike
2. Payment shock when repayment period starts
3. Easy to overspend

Option 4: Reverse mortgage - expensive, but no repayments

If you’re over 60 and don’t want to make monthly payments, a reverse mortgage lets you borrow against your home without paying anything back until you sell, move out, or die.

It sounds like magic - until you see the numbers. In 2026, the average interest rate on a reverse mortgage in Australia is 9.2%. And interest compounds monthly. That means if you borrow $100,000 today, in 10 years you could owe $250,000 - even if you never make a payment.

That’s not a typo. Compounding interest eats equity fast. If your home is worth $800,000 and you owe $250,000 after 10 years, you’ve lost over 30% of your equity - and your kids might inherit nothing.

Reverse mortgages are regulated by ASIC and come with mandatory financial counseling. That’s good. But it doesn’t make them cheap. They’re the most expensive way to access equity - unless you have no other options.

Pros:

1. No monthly repayments
2. Available to seniors with little income

Cons:

1. High fees and interest
2. Equity shrinks fast due to compounding
3. Reduces inheritance

Option 5: Downsizing - the silent winner

This isn’t a loan. It’s a strategy. Sell your big family home, buy a smaller one, and pocket the difference.

Let’s say you live in a $1.2 million house with $700,000 equity. You sell, buy a $500,000 unit, and walk away with $200,000 cash. No interest. No fees. No debt.

Many retirees in Sydney are doing this. The money can fund travel, medical care, or a comfortable retirement. And you’re not locked into a loan with rising rates.

Downsizing isn’t for everyone. You might love your garden. Your neighborhood might be irreplaceable. But if you’re willing to move, it’s the only way to take equity out without paying interest at all.

Pros:

1. No interest. No fees. No debt.
2. Reduces ongoing costs - rates, maintenance, utilities
3. May qualify for government concessions (e.g., pensioner concessions)

Cons:

1. Emotional cost - leaving a home you love
2. Stamp duty and moving costs (around $15,000-$25,000)
3. May not be possible in tight housing markets

Which option is truly the cheapest?

Here’s the truth: cash-out refinance is almost always the cheapest if you qualify. Why? Because you’re getting a mortgage rate, not a second loan rate. And mortgages are the lowest-cost borrowing in Australia.

But if you can’t refinance - maybe your credit score dropped, or you’re retired - then a home equity loan might be your next best bet. Avoid HELOCs unless you’re disciplined. Avoid reverse mortgages unless you have no other choice.

And if you’re over 60 and your home is your biggest asset? Downsizing isn’t just smart - it’s the only way to take equity out without paying a cent in interest.

What to avoid at all costs

Don’t use credit cards to tap your home equity. That’s like using a blowtorch to light a candle. High rates, no tax benefits, no protection.

Don’t trust “no-fee” equity products. There’s no such thing. Fees are just hidden in the interest rate.

Don’t borrow more than you need. Every dollar you take out is a dollar you’ll pay interest on - for decades.

Real example: Sarah, 58, Sydney

Sarah owned a $950,000 home with $600,000 equity. She needed $80,000 to fix her roof and replace her aging boiler. She had a 4.8% mortgage and good credit.

She refinanced to a $750,000 loan at 5.4%. Her new payment went up by $280/month - but she got $80,000 cash. Total cost over 20 years: $124,000 in interest.

If she’d taken a home equity loan at 7.8%, she’d have paid $156,000 in interest. If she’d used a reverse mortgage? She’d owe $210,000 in 10 years.

She chose the refinance. It saved her $86,000.

Next steps: How to decide

Ask yourself these questions:

• Do I have good credit and steady income? → Go for cash-out refinance
• Do I need a small amount and want fast access? → Consider a home equity loan
• Am I retired and don’t want monthly payments? → Talk to a financial counselor about reverse mortgages - but only as a last resort
• Can I downsize? → Do the math. You might end up richer than you think

Get quotes from at least three lenders. Compare total cost - not just monthly payments. Use the MoneySmart calculator to see how much you’ll pay over time.

And remember: your home isn’t just an asset. It’s your security. Don’t trade it for short-term cash unless you’ve looked at every option - and understood the long-term cost.