What Is Home Equity and How Can You Use It?
What Is Home Equity?
If you've owned your home for a few years, you may have heard the term "equity" used when talking about refinancing, renovations or buying an investment property.
But what exactly is home equity?
Put simply, your home equity is the portion of your property's value that you own outright, after accounting for the amount you still owe on your mortgage.
The basic calculation is:
Property value − Home loan balance = Home equity
For example, if your home is worth $800,000 and you owe $500,000 on your mortgage:
$800,000 − $500,000 = $300,000 equity
That doesn't necessarily mean you can borrow the full $300,000.
This is where the difference between total equity and usable equity becomes important.
What Is Usable Equity?
Usable equity is the amount of equity you may potentially be able to access through a new or increased loan, while keeping the lending within an acceptable loan-to-value ratio (LVR).
For many standard residential loans, lenders may consider lending up to around 80% of a property's value without Lenders Mortgage Insurance, although the exact amount available will depend on the lender and your circumstances.
Using the previous example:
Property value: $800,000
80% of property value: $640,000
Existing mortgage: $500,000
Potential usable equity:
$640,000 − $500,000 = $140,000
So while you have $300,000 in total equity, your potential usable equity could be around $140,000.
And even that $140,000 isn't automatically available.
The lender will still need to assess your income, expenses, existing debts and ability to
service the additional borrowing.
How Do You Build Equity in Your Home?
There are generally two main ways your equity can increase.
1. Paying down your mortgage
Every time you make a mortgage repayment, a portion goes towards reducing your loan balance.
As your loan balance decreases, your equity increases — assuming the property value stays the same.
For example:
Property value: $700,000Mortgage: $500,000Equity: $200,000
If you reduce your mortgage to $450,000:
Property value: $700,000Mortgage: $450,000Equity: $250,000
You've increased your equity by $50,000 simply by reducing the loan balance.
2. Your property increases in value
Your equity can also increase if the value of your property rises.
For example:
Original property value: $700,000Original mortgage: $500,000Original equity: $200,000
If the property is later valued at $850,000 and your mortgage has reduced to $475,000:
$850,000 − $475,000 = $375,000 equity
Your equity has increased substantially through a combination of mortgage repayments and an increase in the property's value.
However, property values can also fall.
It's important not to assume that your property will always increase in value.
How Is Your Property Value Determined?
When you're looking to access equity, the lender will generally need to determine the current value of your property.
This may involve a property valuation.
Depending on the lender and circumstances, the valuation could be:
A desktop valuation
An automated valuation
A kerbside valuation
A full valuation involving an inspection
The valuation is important because your available equity is based on the lender's accepted property value — not simply what you believe your property is worth.
For example, you may believe your home is worth $900,000 based on recent sales in your area.
If the lender's valuation comes back at $850,000, your usable equity may be lower than you expected.
What Can You Use Home Equity For?
One of the most useful things about building equity is that you may be able to access it for a range of purposes.
Depending on your circumstances and lender policy, this could include:
Buying an investment property
One common use of home equity is helping fund the deposit and purchasing costs for an investment property.
Instead of having to save another deposit entirely from your income, you may be able to use some of the equity in your existing home.
For example:
Existing home value: $900,000Existing mortgage: $500,000Potential usable equity: $220,000
You may potentially use some of that equity towards purchasing an investment property.
However, you'll still need to demonstrate that you can afford the additional borrowing.
Using Equity to Buy an Investment Property
Using equity to purchase an investment property can be a useful strategy, but it's important to understand how the loans are structured.
You may have:
Loan 1: Existing home loanLoan 2: Equity release for the investment depositLoan 3: Investment property loan
The exact structure will depend on the lender and your circumstances.
Keeping different purposes separated into different loan splits can also make it easier to track how the borrowed funds have been used.
If you're considering using equity to invest, it's worth speaking with your mortgage broker and accountant before proceeding.
Using Equity for Renovations
You may also be able to use equity to fund renovations or improvements to your home.
This could include:
Kitchen renovations
Bathroom renovations
Extensions
Outdoor improvements
Structural work
Landscaping
New flooring
General home improvements
Instead of paying for the renovation entirely from savings, you may be able to increase your mortgage and use the additional funds towards the project.
However, borrowing money for renovations means you'll be paying interest on that additional debt, so it's important to consider the long-term cost.
Can You Use Equity to Buy a Car?
Potentially, yes.
Some homeowners consider accessing their home equity to purchase a vehicle.
However, this doesn't necessarily mean it's the best option.
A mortgage can have a much longer loan term than a car loan.
For example, borrowing $40,000 against a home loan and taking 30 years to repay that additional amount could result in significantly more interest being paid over time than if the amount were repaid over a shorter period.
If you do use home equity for a vehicle or other personal expense, it's important to consider the loan structure and repayment period carefully.
Can You Use Home Equity to Consolidate Debt?
Another potential use of equity is debt consolidation.
For example, you may have:
Credit card debt
Personal loans
Car finance
Other eligible debts
Depending on your circumstances, you may be able to refinance and consolidate some of these debts into your home loan.
This can potentially reduce the interest rate and simplify your repayments.
However, there is an important catch.
You may be taking short-term debt and turning it into long-term mortgage debt.
For example, if you consolidate a $15,000 credit card balance into a 30-year mortgage and don't make additional repayments, you could end up paying interest on that $15,000 for many years.
Debt consolidation should therefore be considered carefully rather than simply viewed as a way to reduce your monthly repayments.
Can You Use Equity to Buy Another Property?
Yes, potentially.
This is one of the most common questions homeowners ask when they've built up substantial equity.
For example, imagine you own a home worth $1 million and have a $600,000 mortgage.
Your total equity is:
$1,000,000 − $600,000 = $400,000
At an 80% LVR, the maximum total lending against the property could be around $800,000.
That could leave approximately:
$800,000 − $600,000 = $200,000
of potential usable equity.
You may potentially use some of that equity towards the deposit and purchasing costs for another property.
But there's an important distinction:
Having enough equity doesn't automatically mean you can afford another property.
The lender will also assess your ability to service the additional debt.
Equity vs Borrowing Capacity: They're Not the Same Thing
This is one of the most important things to understand.
You could have a significant amount of equity but not have enough income to borrow against all of it.
For example, you might own a property worth $1 million and only owe $300,000.
That gives you substantial equity.
But if your income doesn't support another large loan, a lender may not allow you to access all of that equity.
Conversely, someone with a strong income may have excellent borrowing capacity but not enough equity or deposit to purchase the property they want.
When assessing your options, you need to consider both equity and borrowing capacity.
Does Accessing Equity Mean You Get Free Money?
No.
This is an important misconception.
When you access your equity, you're generally borrowing against your property.
The additional funds become debt.
For example, if you have a $500,000 mortgage and access $100,000 of equity, you haven't received $100,000 of free money.
You've potentially increased your total borrowing to $600,000.
You'll generally pay interest on the additional borrowing and will need to repay it.
Your home may also be used as security for the loan.
Do You Need to Refinance to Access Equity?
Not necessarily.
Depending on your existing lender and circumstances, you may be able to:
Increase your existing home loan
Establish a separate loan split
Refinance to another lender
Access equity as part of a new loan application
The most appropriate structure will depend on why you're accessing the equity and your broader financial position.
For example, if you're using equity for an investment purchase, keeping the investment-related borrowing separate from your owner-occupied debt may be worth considering.
How Much Equity Can I Borrow?
There isn't one universal amount.
The amount you can access will depend on factors including:
Your property's current value
Your existing mortgage balance
The lender's maximum LVR
Your income
Your living expenses
Existing debts
Number of dependants
Credit history
Purpose of the additional borrowing
The lender's servicing policy
A lender may also apply different requirements depending on what you're using the money for.
That's why an equity calculation based purely on your property value isn't enough.
Example: Calculating Potential Usable Equity
Let's look at another example.
You own a property worth $850,000.
Your current mortgage is $480,000.
Step 1: Calculate total equity
$850,000 − $480,000 = $370,000 total equity
Step 2: Calculate 80% of the property value
$850,000 × 80% = $680,000
Step 3: Subtract your existing mortgage
$680,000 − $480,000 = $200,000 potential usable equity
So you may have approximately $200,000 of potential usable equity based on an 80% LVR.
However, the lender would still need to assess whether you can afford the additional $200,000 borrowing.
The actual amount available may therefore be lower.
What Happens If Your Property Value Falls?
Equity isn't guaranteed.
If your property value decreases, your equity can also decrease.
For example:
Property value: $800,000Mortgage: $500,000Equity: $300,000
If the property value falls to $700,000:
$700,000 − $500,000 = $200,000 equity
Your equity has fallen by $100,000 even though your mortgage hasn't changed.
This is another reason not to assume that today's available equity will always be available in the future.
Is Using Equity Risky?
Accessing equity isn't necessarily risky in itself, but it does increase your level of debt.
Before borrowing against your home, you should consider:
Whether you can comfortably afford the increased repayments
What the money is being used for
Whether the purpose is likely to provide a worthwhile benefit
The interest cost over the life of the loan
What would happen if interest rates increased
What would happen if your income decreased
Whether you're putting too much debt against your home
Remember that your property is generally being used as security for the lending.
Borrowing more against your home should therefore be treated as a significant financial decision.
Common Questions About Home Equity
What is home equity?
Home equity is the difference between the current value of your property and the amount you still owe on your mortgage.
How do I calculate my home equity?
Simply subtract your outstanding home loan balance from your property's current value.
Property value − Mortgage balance = Equity
What is usable equity?
Usable equity is the amount of equity you may potentially be able to borrow against while remaining within the lender's acceptable LVR limits.
Can I use equity as a deposit for another property?
Potentially, yes. Some homeowners use available equity in their existing property to help fund the deposit and purchasing costs for another property.
You still need to meet the lender's borrowing and servicing requirements.
Can I use equity to renovate my home?
Yes, potentially. Depending on your circumstances, you may be able to increase your home loan or establish a separate loan split to fund renovations.
Can I access equity without refinancing?
Potentially. Your existing lender may allow you to increase your lending or establish an additional loan split. Alternatively, refinancing may be considered.
Does using equity increase my mortgage?
Yes. Accessing equity generally involves taking on additional debt, which increases your overall borrowing.
How much equity do I need to buy an investment property?
There isn't one fixed amount.
The amount you'll need will depend on the investment property's purchase price, deposit requirements, purchasing costs, lender policy and your borrowing capacity.
Can I use equity to pay off credit cards?
Potentially, yes. Debt consolidation may be an option for some borrowers, but you should consider the total interest cost and loan term before proceeding.
Why Choose Formulate Finance Group?
If you've owned your home for a few years, you may have more options available to you than you realise.
At Formulate Finance Group, we can help you understand how much equity you may have and whether accessing it could be suitable for your goals.
Whether you're considering:
Buying an investment property
Renovating your home
Refinancing
Consolidating debt
Purchasing another property
Releasing funds for another purpose
we can help you work through the numbers and understand the potential loan structures available.
Importantly, having equity doesn't automatically mean you should use it.
We'll look at the bigger picture, including your borrowing capacity, existing debts, repayments and what you're hoping to achieve.
Final Thoughts: Your Home May Be Worth More Than You Think
If you've owned your property for several years, it's worth understanding how much equity you've built up.
Your equity could potentially help you achieve your next financial goal — whether that's renovating your home, purchasing an investment property or restructuring your existing loans.
But equity isn't free money, and accessing it means taking on additional debt.
Before making a decision, it's important to understand:
How much equity do I have?How much of it can I actually access?Can I afford the additional repayments?What is the best way to structure the lending?
If you're curious about what your property equity could potentially help you achieve, getting an up-to-date assessment can be a useful place to start.
Wondering how much equity you have?
Get in touch with Formulate Finance Group to discuss your equity, borrowing capacity and lending options.
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