Property equity is the difference between your property’s current market value and its home loan balance. It shows the share of the property that you own.
Equity grows as your loan balance falls or your property’s value rises. Investors often use this equity to fund renovations or buy an investment property. However, accessing equity means taking on more debt. You should review the costs and risks before proceeding.
What Is Property Equity and How Does It Work?
Property equity is the difference between your property’s current market value and your current loan balance. It represents your ownership stake in the property. If your property is worth $400,000 and you owe $220,000, you have $180,000 in total equity.
Equity grows when you reduce the loan amount or your property rises in value. Regular and extra repayments lower your existing loan balance. Market growth and making improvements also build equity. However, total equity differs from usable equity. Usable equity is the amount most lenders will let you borrow against.
The following example uses a common formula: usable equity equals 80% of the property’s value minus the current loan balance.
| Property Equity Example | Amount |
|---|---|
| Current market value | $400,000 |
| Current loan balance | $220,000 |
| Total property equity | $180,000 |
| 80% of the property’s value | $320,000 |
| Estimated usable equity | $100,000 |
How Much Equity Can You Access?
Usable equity is the part of your home equity that you can borrow against. Most banks allow borrowing up to 80% of the property’s current market value without Lenders Mortgage Insurance.
To estimate your usable equity, multiply the property’s value by 80% and subtract your current loan balance. In the earlier example, 80% of $400,000 is $320,000. After subtracting the $220,000 loan balance, the estimated usable equity is $100,000.
How much equity you can access depends on your borrowing power. A lender reviews your income, living costs, other debts, and repayments. It will also consider current interest rates. Having usable equity does not guarantee approval for a larger home loan. It is also important to note that borrowing at an 80% or higher loan-to-value ratio often requires Lenders Mortgage Insurance, and that each lender has its own limits and approval rules.
| Usable Equity Calculation | Calculation | Amount |
|---|---|---|
| Current market value | Property valuation | $400,000 |
| Lending amount at 80% | $400,000 × 80% | $320,000 |
| Less current loan balance | $320,000 − $220,000 | $100,000 |
| Estimated usable equity | Before a lending review | $100,000 |
| Total equity for comparison | $400,000 − $220,000 | $180,000 |
How to Build Equity in Your Home
You build equity by lowering your home loan balance or increasing your property’s value. Some methods have direct results. Others depend on the property market and the value added by improvements.
Common ways to build equity include:
- Make regular repayments: Each principal payment reduces what you owe.
- Make extra repayments: Extra payments reduce your loan balance faster and potentially save interest.
- Benefit from market growth: Your equity grows when your property rises in value.
- Making improvements: The right renovations increase your home’s value.
- Limit further borrowing: Avoiding additional debts helps protect the equity you have built.
Renovations do not always add more value than they cost. Compare the likely rise in value with the full project cost. A current property valuation gives a clearer view of your equity.
Using Equity to Buy an Investment Property
You can use usable equity to help cover the deposit and purchase costs for an investment property or a second property. Accessing equity increases the debt secured against your existing home. It does not provide free money.
The process usually involves:
- Estimating the current market value of your home.
- Checking your current home loan balance.
- Calculating your estimated usable equity.
- Asking a lender to assess your borrowing power.
- Setting up a separate loan split for the deposit and costs.
- Applying for finance to purchase the new property.
The bank will review your income, living costs, additional debts, and other repayments. It will also assess your expected rental income and higher repayments. Enough equity for a deposit does not ensure loan approval. You must show you can repay both the existing loan and the new loan.
How Home Equity Loans Affect Borrowing Power
Home equity loans let you borrow against the usable equity in your property. The property secures the debt, so the rate is often lower than on an unsecured personal loan. However, the new loan amount increases your total debt and repayments.
When assessing your borrowing power, a lender considers:
- Income: Your salary, rental income, and other reliable earnings.
- Living expenses: Your regular household and personal costs.
- Existing loans: Your home loan, investment loans, and car finance.
- Other debts: Credit cards, personal loans, and buy now, pay later accounts.
- Interest rates: The lender will test your budget at a higher rate.
- Loan term: A shorter term means higher repayments. A longer term means more interest.
- Repayment history: Regular, timely repayments support your application.
- Expected rent: Lenders usually count only part of the proposed rental income.
A large amount of home equity does not guarantee approval. The bank asks for proof of your financial situation and checks whether you can afford the higher repayments. Using equity now could reduce your borrowing power for the next property.
Other Ways to Use Home Equity
Home equity can support other financial goals besides buying an investment property or a second property. Each option adds debt. Compare the likely benefit with the extra repayments and interest costs.
Homeowners often use equity for:
- Making improvements: Fund work that improves comfort, rental appeal, or market value.
- A second home: Help pay the deposit and other purchase costs.
- Shares or managed funds: Borrow money to invest outside the property market.
- Big expenses: Cover high planned costs without using a personal loan.
- Debt consolidation: Move higher-interest debts into a home loan with a lower rate.
The purpose of the borrowed money decides its tax treatment. Interest is not tax-deductible just because your home secures the loan. A longer loan term could mean paying more interest overall, even with lower repayments. Seek tax advice from a registered tax agent before using equity for an investment or debt consolidation.
Other Factors and Risks to Consider Before Using Equity
Accessing equity increases your total debt and regular repayments. Rising interest rates or a fall in household income could place pressure on your cash flow. Unexpected costs could have the same effect. Check whether you could still meet repayments if your financial situation changed.
Using equity to invest places your existing home at greater risk. Its value could fall, rental income could drop, or the investment property could sit vacant. These events reduce your available equity and make the debt harder to manage.
Before accessing equity, seek professional advice about loan structure, tax position, and risks involved. A lender or mortgage broker will assess your borrowing power. A financial adviser will review your wider financial position. A registered tax agent will explain the tax implications.
| Factor or Risk | Why It Matters | What to Consider |
|---|---|---|
| Higher debt | You will owe more money | Review new repayments and interest costs |
| Rising interest rates | Higher rates increase repayments | Test your budget using a higher rate |
| Falling property values | A fall in value reduces your equity | Do not rely on steady market growth |
| Rental vacancy | No rent reduces your cash flow | Keep savings for repayments and costs |
| Income changes | Lower income makes debt harder to repay | Maintain an emergency cash reserve |
| Home used as security | The lender holds security over the property | Check which property secures each loan |
| Lower borrowing power | More debt limits future loan options | Review your long-term investment plans |
| Tax implications | Tax treatment depends on how you use the funds | Keep records and seek tax advice |
Can You Use Equity to Buy a Second Home?
You can use usable equity to help pay the deposit and purchase costs for a second property. This lets you borrow against your existing property instead of saving the full deposit in cash.
Before approving the new mortgage, a lender will assess:
- Usable equity: The amount available under its loan-to-value ratio.
- Borrowing power: Your ability to repay both home loans.
- Income and expenses: Your earnings, household costs, and regular commitments.
- Existing debts: Your credit cards, personal loans, and car finance.
- Purchase costs: Stamp duty, legal fees, inspections, and other costs.
- Loan security: The property or properties that will secure each loan.
- Higher repayments: The effect of extra debt on your household budget.
Having enough equity for a deposit does not mean you will qualify for the new loan. You must still meet the lender’s rules and show you can afford the repayments. Review your financial position, plans, and the risks before using equity to buy a second property.
Is Using Property Equity Right for You?
Property equity will help fund an investment property, renovation, or second property. However, total equity and usable equity are not the same. Accessing equity also increases your debt. Review your borrowing power, repayment capacity, loan structure, and financial goals before proceeding.
If you use your equity to buy an investment property, a tax depreciation schedule will identify eligible depreciation deductions. These deductions reduce taxable rental income and improve cash flow. Get a free quote from Thrifty Tax today to see how much depreciation you could claim.
