How to Use Equity in Your Home

The short answer

Equity is the part of your property you own outright. As your loan reduces and your property grows in value, it builds up, and you can borrow against it to fund your next goal, like an investment property or a renovation.

How much you can access, and how you set it up, makes a real difference to your borrowing power, your tax position and your flexibility down the track.

What equity is, and how much you can use

• Equity: your property’s value minus what you owe.
• Usable equity: the amount you can actually borrow against. Most lenders let you borrow up to 80% of your property’s value without LMI, so usable equity is usually 80% of the value, minus your current loan.

Example: your home is worth $1,200,000 and you owe $500,000.

	Amount
Total equity ($1,200,000 − $500,000)	$700,000
80% of the property’s value	$960,000
Usable equity ($960,000 − $500,000)	$460,000

You can sometimes access more by borrowing above 80% with LMI, though that adds cost.

LMI waivers: many lenders have LMI waiver policies for certain professions, such as bank staff, medical professionals, accountants and lawyers. If you’re eligible, you may be able to access more of your equity, often up to 85–90% of your property’s value, without paying LMI.

Equity isn’t borrowing power

Having equity doesn’t automatically mean you can borrow it. Any extra loan still needs to pass the lender’s serviceability test, so you’ll need the income to cover the higher repayments.

It’s common to have plenty of equity but be limited by borrowing capacity, or the other way around. Both need to line up.

How to access it

• A loan increase: you borrow more against your property, usually with your current lender or by refinancing to a new one.
• A separate split: the released funds are best set up as their own loan split, rather than added to your existing home loan.
• A valuation: the lender values your property to confirm how much equity is available.
• Keep it flexible: setting the equity split on interest only, with the funds held in an offset, keeps your cash available until you need it. You’re not paying down money you haven’t spent yet.

What you can use it for

• An investment property: equity can cover your deposit and purchase costs, so you may not need cash savings.
• Renovations: to improve your home, or add value before selling.
• Other goals: such as buying a car or supporting family, though borrowing against your home for these deserves careful thought.

Keep each purpose separate. Interest is generally only tax deductible based on what the money is used for. Keeping investment funds in their own split, away from personal spending, keeps your records clean and protects your deductions. Check the details with your accountant.

Valuations and getting the most equity

The value that counts is the lender’s valuation, which can differ from online estimates or what you think your home is worth. Different lenders can also value the same property differently.

We can check values with several lenders before you apply, so you know how much equity is really available. Sometimes the best strategy is to release equity from the lender with the strongest valuation, and take your next loan with another lender that offers more borrowing capacity.

Standalone vs cross-collateralised

When you use equity to buy another property, the loans can be set up two ways:

• Standalone: each property secures its own loan. This is usually more flexible if you later want to sell, refinance or move one loan.
• Cross-collateralised: two or more properties secure the loans together. It can seem simpler, but it can make future changes harder.

We cover this in more detail in our loan structuring lesson.

A full tank?

Equity is like fuel in the tank. Knowing how much you’ve got is easy. Knowing how far it will take you, and the best route to get there, is the tricky part.

That’s where we come in. With access to over 40 lenders, our team of lending specialists can work out your usable equity, structure it properly from day one, and line it up with your borrowing capacity, so you can focus on the most important part: living your life.

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General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or tax advice. Lender policies and valuations vary. Examples are illustrative. Seek advice from a licensed credit adviser and your accountant before acting. Insight Property Finance.