If you own a home, you may have built up more equity than you realise. But knowing how much equity you have and understanding how you could use it are two different things.
Home equity can potentially help fund renovations, support the purchase of an investment property or provide greater financial flexibility as your circumstances change. However, accessing it means taking on additional borrowing, so it’s important to understand the numbers before making a decision.
Whether you’ve owned your home for years or have seen its value increase since purchasing, understanding your equity is a useful starting point when considering your next financial move.
What is home equity?
Home equity is the difference between your property’s current market value and the outstanding balance on your home loan.
For example, if your home is worth $900,000 and you owe $300,000 on your mortgage, you have $600,000 in equity.
Your equity can increase as you repay your home loan or if your property increases in value. It can also decrease if property values fall or you borrow additional funds against your home.
However, having $600,000 in equity doesn’t mean you can automatically borrow that amount. Lenders assess your income, expenses, existing debts, repayment capacity and the value of your property before deciding how much they may be prepared to lend.
This is where the difference between total equity and usable equity becomes important.
How much usable equity could you access?
Usable equity is the portion of your property’s value that a lender may allow you to borrow against, subject to its lending criteria and your financial circumstances.
As a general guide, many lenders use 80% of a property’s value as a common threshold when assessing equity access without Lenders Mortgage Insurance (LMI). This is not a guarantee of approval, and some lending arrangements may differ.
Let’s look at an example.
Imagine your home is currently valued at $900,000 and your outstanding mortgage is $300,000.
- Current property value: $900,000
- 80% of the property value: $720,000
- Existing home loan: $300,000
- Potential usable equity: $420,000
In this simplified example, $420,000 may be available to borrow against the property before considering the lender’s assessment and any other relevant costs or restrictions.
The important distinction is that this is potential borrowing capacity secured against your home, not money sitting in a bank account. You would need to repay any additional amount borrowed, along with interest.
What can you use your home equity for?
Depending on your circumstances and the lender’s requirements, accessing equity may help fund a range of goals.
1. Renovating your home
Some homeowners use equity to fund improvements such as a new kitchen, bathroom, extension or outdoor entertaining area.
For example, a couple may want to renovate their kitchen and living area at a cost of $100,000. Rather than using all their savings, they could explore whether borrowing against their home equity is a suitable option.
Before proceeding, they would need to consider the renovation budget, additional repayments and whether the improvements are likely to support their longer-term plans for the property.
2. Purchasing an investment property
Equity may also help fund the deposit and associated purchase costs for an investment property.
For example, a homeowner with substantial equity may be considering purchasing a $600,000 investment property. They could explore using some of their existing property’s equity towards the deposit and purchase costs, rather than relying entirely on cash savings.
However, the lender would still need to assess the proposed investment loan, the homeowner’s existing commitments and their ability to manage repayments across both properties.
Using equity in this way also means that the home used as security may be exposed if the additional borrowing cannot be repaid.
3. Consolidating existing debts
In some circumstances, homeowners consider using equity to consolidate higher-interest debts, such as credit cards or personal loans.
For example, someone with $25,000 in personal debt may explore whether refinancing or increasing their home loan could reduce their overall interest costs or simplify their repayments.
However, there is an important trade-off. Consolidating short-term debts into a mortgage can mean repaying that debt over a much longer period. It also changes unsecured debt into borrowing secured against the home.
Any potential savings need to be weighed against fees, the total interest paid over time and the risks of securing the debt against your property. Debt consolidation is not necessarily the right option for everyone.
How can you access your home equity?
There are several ways lenders may allow homeowners to access equity. The most suitable approach depends on your existing loan, what you intend to use the funds for and the lender’s criteria.
Home loan top-up: You may be able to increase your existing home loan and receive additional funds as a lump sum, subject to approval.
Separate loan split: A lender may allow you to establish a separate loan account secured against your property. Keeping borrowing for different purposes in separate accounts can make it easier to track the funds and their use.
Refinancing: This involves replacing your existing home loan with a new loan. Depending on your circumstances, refinancing may allow you to access equity while reviewing your interest rate, loan features and overall lending arrangements.
Line of credit: Some lenders offer a revolving credit facility secured against a property, allowing you to draw funds up to an approved limit. These facilities have specific terms and risks, so it’s important to understand how interest is charged and how the balance will be repaid.
Each option has different features, costs and eligibility requirements. Comparing them with your current loan can help you understand which approach may be worth exploring.
How do changing property prices affect your equity?
Your equity is closely linked to your property’s market value. If property prices increase, your equity may grow even if your mortgage balance stays the same. If prices fall, the amount of equity available may decrease.
Consider two homeowners who each purchased a property for $800,000.
The first homeowner has owned their property for several years and reduced their mortgage from $650,000 to $400,000. If the property is now valued at $850,000, they have $450,000 in total equity.
The second homeowner purchased more recently with a smaller deposit and still owes $750,000. If their property is now valued at $780,000, their total equity is just $30,000.
These simplified examples show how the size of your deposit, mortgage repayments and changes in property value can affect your position.
They also highlight why it’s important to establish your property’s current value rather than relying on what you paid for it or what similar properties sold for some time ago.
What should you consider before accessing equity?
Accessing home equity can create opportunities, but it also increases the amount you owe. Before proceeding, consider the wider financial implications.
- Repayments: How much could your repayments increase, and would they remain manageable if interest rates rose?
- Borrowing capacity: Will the additional loan affect your ability to borrow for other plans in the future?
- Property valuation: What is your home worth now, and will the lender require a formal valuation?
- Loan costs: Are there establishment fees, valuation costs, refinancing expenses or other charges?
- Your financial buffer: Could you manage repayments if your income changed or an unexpected expense arose?
- Your objective: Does the proposed use of the funds support your financial goals, and have you considered the risks?
Remember, your home is being used as security for the borrowing. If you cannot meet your repayment obligations, you could put your property at risk.
Review your home equity options with Ironbark Group
If you’re considering renovating, purchasing an investment property or exploring other uses for your home equity, the first step is understanding your current position.
At Ironbark Group, we can review your existing home loan, discuss your borrowing options and help you understand the lending requirements involved in accessing equity.
This may include assessing your current loan arrangements, considering whether refinancing or a separate loan facility is worth exploring, and outlining the information a lender may require, including a property valuation.
Contact Ironbark Group to discuss your home equity options and find out what may be possible based on your property, existing loan and financial circumstances.