Common Mistakes When Refinancing to Fund Education

You refinance to access equity because the alternative is draining savings or leaning on credit cards.

The decision usually comes when a child starts private school, heads to university, or when you're funding your own return to study. South Yarra properties have typically built solid equity over time, which makes refinancing to release those funds a sensible option. But the structure you choose determines whether you're borrowing efficiently or paying more interest than necessary.

Borrowing the Full Amount Upfront When You Don't Need It Yet

You don't need to draw all the equity at once. If you're funding school fees over several years, borrowing the total amount upfront means you're paying interest on funds sitting idle in an offset account or redraw. A line of credit or progressive drawdown structure lets you access equity as tuition invoices arrive, so interest only accrues on what you've actually used. In our experience, this approach can reduce interest costs by thousands of dollars over a four-year degree.

Consider a scenario where you need $60,000 over three years for private school fees. Borrowing the full amount at the start means you're servicing the entire debt from day one. Drawing $20,000 annually as each invoice is due keeps your loan balance lower in the early years, and interest is calculated on a smaller outstanding amount.

Should You Capitalise Interest or Service It Separately?

Capitalising interest means adding it to the loan balance rather than making regular repayments. This keeps your cashflow intact in the short term, but it compounds quickly. Over a three-year postgraduate degree, capitalised interest on a $40,000 drawdown could add several thousand dollars to what you ultimately repay.

Servicing the interest separately, even on an interest-only basis, keeps the principal stable and gives you a clearer picture of what the education component of your mortgage actually costs. If cashflow is tight, you could structure part of your loan as interest-only while keeping the rest on principal and interest to maintain some equity progress. Refinancing to release equity gives you flexibility to structure repayments in a way that aligns with your broader financial position.

How Lenders Assess Equity Drawdowns for Education

Lenders treat equity release for education the same way they assess any cash-out refinance. They'll require a current valuation, and your borrowing capacity must support the increased loan amount. South Yarra properties have held value well, particularly those near Toorak Road or within the Domain precinct, so valuations often come in at or above expectation.

The complication arises when your income hasn't shifted but your loan amount has. If you're already at 80% loan-to-value ratio and your valuation doesn't come in high enough, you may need to accept a smaller drawdown or pay lenders mortgage insurance on the increased amount. Knowing your property's likely value before you apply avoids disappointment and lets you plan around realistic figures.

Fixed or Variable for an Equity Release?

If you're drawing equity specifically for education costs that span several years, fixing the portion you draw gives you certainty around repayments during that period. Variable rates give you flexibility to make extra repayments without penalty, which matters if you plan to pay the education component down quickly once fees are finished.

Some clients split the new borrowing, fixing a portion to cover anticipated tuition costs and leaving the rest variable to maintain redraw access and repayment flexibility. There's no universal answer, but aligning your rate type with how and when you plan to repay makes the refinance work harder. If you're coming off a fixed term already, refinancing to a lower interest rate while simultaneously accessing equity can deliver savings on your existing debt as well as funding for education.

Tax Deductibility and Keeping the Purpose Clear

Equity drawn for education is not tax-deductible unless the course directly relates to generating assessable income in your current occupation. If you're funding a child's schooling or degree, the interest on that portion of your loan is a personal expense.

Keeping the education drawdown separate in your loan structure, either as a split or sub-account, makes tracking straightforward if your circumstances change. If you later use other equity for investment purposes, the clear separation means your accountant can easily identify which interest is deductible and which isn't. Equity release for multiple purposes benefits from clean documentation from the start.

Refinancing vs Topping Up Your Existing Loan

If your current lender offers a competitive rate and the features you need, topping up your existing loan is usually faster and involves less paperwork than a full refinance. But if your rate is no longer competitive, or your lender doesn't offer offset accounts or flexible repayment structures, refinancing to a new lender while accessing equity can deliver long-term value beyond the immediate drawdown.

South Yarra clients often find that refinancing delivers a lower rate, improved features, and the equity access they need in a single transaction. The application process takes longer than a top-up, but the outcome is a loan structure that supports your goals for the next several years, not just the immediate need. Home loan refinancing lets you reassess your entire loan setup rather than simply increasing your borrowing with your current lender.

Call one of our team or book an appointment at a time that works for you.

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