Most owners who ask us about equity have the same picture in their head: the house is worth a lot more than it was, so there must be a pile of money sitting in it. There is, in a way. But the number you can actually get at is smaller than the number on the valuation, and the gap catches people out.
Equity versus usable equity
Equity is simple. It is what your property is worth, minus what you owe on it. If the home is worth $1,500,000 and the loan is $600,000, your equity is $900,000.
Usable equity is the part a lender will let you borrow against. Most lenders stop at 80 per cent of the property's value if you want to avoid lenders mortgage insurance. So the sum looks like this:
- $1,500,000 x 80% = $1,200,000 (the most you could owe in total)
- $1,200,000 minus the $600,000 you already owe = $600,000 usable equity
That is $300,000 less than the full equity figure, and it is the first thing to get your head around. The last 20 per cent of the value is the lender's cushion. Some lenders will go higher, but you would normally pay for it through lenders mortgage insurance or a tighter set of conditions.
The valuation is the lender's, not yours
Everything above hangs on the value, and the value is whatever the lender's valuer says it is. Not the agent's appraisal, not the neighbour's sale, and not the online estimate you checked last night.
Online estimates can sit well above or below a formal valuation, especially for properties that are not typical for the street. Think of a sloping block, a waterfront position, a dated house on a big lot or a unit in an older building. Two lenders can also reach different numbers for the same address. If the valuation comes in lower than you hoped, every figure in the sum above moves with it.
Having equity is not the same as being able to borrow it
This is the second catch. Even if the equity is there, the lender still has to be satisfied you can afford the extra repayments. That means the same serviceability test as any other loan: your income, your expenses, your other debts, and the repayment tested at a rate well above what you would actually pay. Our guide to how much you can borrow covers what goes into that test.
In practice, the limit on a lot of equity loans is serviceability, not the 80 per cent line. A couple with a big gap between value and loan but modest income can find the repayments are the bottleneck. Someone who recently changed jobs or went self-employed may find it is the income evidence.
What lenders want to know about the purpose
Lenders ask what the money is for, and the answer changes how the loan is treated. Typical purposes include:
- A deposit on an investment property or a second home
- Renovating or building on the land you already own
- Consolidating other debts into the home loan
- A large personal expense, such as school fees or a business injection
Some purposes are easier to get approved than others, and a few attract extra questions. The purpose also matters for tax. Interest on money borrowed to buy an income-producing asset can be treated very differently from interest on money borrowed for personal use, which is why we suggest you speak to your accountant before you draw anything down. We do not give tax advice.
Keeping the loan split sensible
If you borrow against your home for an investment, how the new borrowing is set up matters. A separate loan for the equity portion, rather than lumping it into your existing loan, keeps the paper trail clean and gives you more control over repayments later. It also means a change in one property does not drag the other along with it. A broker can set this up from the start. It is much harder to unpick afterwards.
Releasing equity versus a line of credit
There are two common ways to reach it. You can refinance or top up the existing loan, which gives you a lump sum and a single repayment plan. Or you can set up a separate facility you draw on when you need it. The first suits a known amount for a known purpose. The second suits an uncertain timeline, like a staged renovation. Neither is better in the abstract, and the right choice depends on what you are doing with the money. Our equity release page goes through how we approach it.
A quick way to check where you stand
- Estimate your property value, and be a little conservative.
- Multiply that figure by 0.8.
- Subtract your current loan balance.
- Treat the result as the ceiling, not the promise. Serviceability and the formal valuation still decide what you get.
If you would like us to run the numbers properly, with a lender view on your specific property, get in touch or call 1300 001 755. We are licensed credit advisers based in Forestville, and a lot of our equity work is for owners across the North Shore and Northern Beaches, from Mosman to Manly and Frenchs Forest.
Frequently asked questions
How much equity can I borrow against my home?
Most lenders will lend up to 80 per cent of your property's value without mortgage insurance. Take 80 per cent of the value and subtract what you owe. The result is your usable equity, subject to a valuation and to whether you can afford the repayments.
What is the difference between equity and usable equity?
Equity is the property's value minus your loan. Usable equity is the part you can borrow against, which is normally capped at 80 per cent of the value minus your loan.
Can I use equity from my home to buy an investment property?
Often yes. Lenders can accept the equity in your current home as security for the deposit and costs on the investment, as long as you can service both loans. How the loans are structured matters, so it is worth planning it before you apply.
Does using my equity affect my borrowing power?
Yes. The new borrowing adds to your total debt, and the lender counts the repayments in its serviceability test. It can lower what you can borrow for other things later.
General information only. It does not take your objectives, financial situation or needs into account, and it is not credit or financial advice. Lender policy, rates and eligibility change regularly and vary between lenders — talk to us about your own circumstances before acting on anything here.