What is Home Equity

Home equity is the total value of the property that you actually own. If you have a home loan, it's calculated as the difference between how much you owe the lender on your home loan and the total value of the property. Equity is usually built up over time as you reduce your mortgage with repayments and as the market value of the property increases. 

A simple way of understanding the concept is to imagine that you sell your current home or investment property today and pay off your mortgage in full – equity is the amount of money you’d have left over. 

Equity is usually calculated based on a bank valuation of the property, subtracting what you currently owe on your home loan (it’s worth knowing that a bank valuation uses different benchmarks and can be lower than a real estate valuation). So, for example, if the market price of your property is $850,000, and your outstanding loan balance is $500,000, you have up to $350,000 of equity. You can also roughly work out your equity using this calculator. 

This is also known as usable equity, as it is the amount you can potentially access.

It’s important to understand that your total equity isn’t necessarily all available for you to use. A lender calculates usable equity as 80% of the value of the property minus the loan balance. 

For example, say your home is valued at $800,000 and you have a home loan of $440,000. Your lender will calculate 80% of the value of the property – 80% of $800,000 is $640,000. This means your usable equity would be calculated as $640,000 (80% property value) minus $440,000 (loan size) = $200,000. You may be able to use this amount in the form of a home loan increase or line of credit secured against your usable equity. 

Another factor that lenders usually take into account is the borrower's ability to service the loan. Even if you technically have a certain amount of usable equity, if your income, expenses and total liabilities don’t allow you to comfortably repay the full loan amount, then you may be able to only unlock the amount that you can afford, rather than the full amount of equity.

Contact us if you want to know more

One common use of equity is towards a deposit for a new property. 

Homeowners often also use equity to: 

• Renovate their current home.

• Invest in shares, bonds, mutual funds or similar financial instruments.

• Pay off other debts like loans or credit card bills.

• Cover major expenses, such as medical bills, education or a new car.

• Fund lifestyle expenses such as a holiday.