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What is home equity and how to use it wisely
Home equity is calculated by subtracting the balance left on your home loan from the current market value of your property. It’s the percentage of the property that you actually own versus the amount you owe your lender.
Most lenders in Australia will lend you up to 80% of the value of your property and not have to pay Lenders Mortgage Insurance (LMI). The threshold is important because breaching it raises the cost and risk of borrowing.
Home equity can be a great way to fund renovations, investments, or family members, but accessing it usually means refinancing or restructuring your loan, which increases your total debt and your long-term repayment obligations.
Usable Equity vs Total Equity
Your total equity is the difference between your property’s current value and your outstanding loan balance. But lenders typically only allow you to access usable equity- up to 80% of your property’s value, minus what you still owe.
Formula: Usable equity = (Property value × 80%) − Loan balance
Example: If your home is worth $800,000 and your loan balance is $400,000:
Usable equity = ($800,000 × 80%) − $400,000 = $240,000
What Is Home-Equity?
The formula for finding home equity is simple:
Home Equity = Value of Property – Balance of Loan Due
For example, if your house is worth $900,000 and your loan balance is $500,000, your equity is $400,000.
Why Equity Fluctuates Over Time
Equity isn’t static; it depends on two primary things:
Loan repayments – as you repay the loan, your equity increases
Property value changes – if the value of your property increases, so does your equity; if it decreases, so does your equity
This means even if you are not actively paying extra, equity can grow purely due to market conditions.
Notice
The calculator is a guide only and does not take into account your personal financial situation, lending criteria or eligibility. The repayments shown are based on your current balance and assume a 30 year loan term. If you borrow over 80% of the property value you may have to pay LMI. You should always seek professional advice before making any financial decisions.
Home Equity Calculator
Understand How Much Equity You Have in Your Property
A home equity calculator helps you estimate the difference between your property’s current market value and your outstanding loan balance. FS Loan helps you understand your available equity so you can plan refinancing, investing, or other financial decisions with more clarity.
How Much Equity Can You Actually Use?
Even if your calculated equity appears high, lenders do not allow you to access all of it. In most cases, the usable portion is capped at 80% of your property’s value.
Example Breakdown
| Component | Amount |
|---|---|
| Property Value | $1,000,000 |
| Maximum Borrowing (80%) | $800,000 |
| Current Loan | $600,000 |
| Usable Equity | $200,000 |
Why Lenders Apply This Limit
- Protects both borrower and lender from market downturns
- Reduces the risk of negative equity
- Avoids LMI costs for the borrower
In some cases, you can borrow above 80%, but this comes with stricter criteria and additional costs.
Why Is Home Equity Important?
For many Australians, their home equity is the largest financial asset they have. If used properly it is a key to long term wealth creation.
Major Benefits of Home Equity
- Funding improvements that increase property values
- Buying investment properties
- Consolidating high-interest debt into a lower-rate loan
- Help family member with deposit on property
Lots of “tappable equity” has been available to leverage existing assets rather than just relying on savings because of strong property price growth in Australia’s big cities.
How do you access your home equity?
You don’t just get equity on the fly, you have to get approved by a lender for a loan and go through the formal loan process. Most often this is done by refinancing or by increasing the size of your current loan.
How It Works
- The lender revalues your property
- Your income and borrowing power are assessed
- When a new loan or top-up is approved
- Funds are paid out cash or credit facility
Every step counts because lenders consider your entire financial picture, not just your equity
What Are the Main Ways to Access Home Equity?
| Method | Best For | Key Drawbacks |
|---|---|---|
| Cash-out refinance | Large expenses (renovations, investments) | Increases total loan size |
| Equity for investment property | Building long-term wealth | Exposure to property market risk |
| Line of credit | Flexible, ongoing access | Higher interest rates and discipline required |
| Reverse mortgage | Retirees needing cash flow | Reduces future inheritance |
Important Consideration
Lines of credit and reverse mortgages are generally more expensive and complex. They should only be considered after evaluating standard refinancing options.
Is Accessing Home Equity Difficult?
Accessing equity is straightforward if you meet lender criteria, but approval is not guaranteed.
Key Factors Lenders Assess
- Loan-to-Value Ratio (LVR):
- Above 80% → Higher risk, possible LMI or rejection
- Income stability:
- Reduced income → Lower borrowing capacity
- Credit history:
- Poor credit → Lower approval chances
- Property valuation:
- Higher value → Increased accessible equity
Simple Breakdown
| Situation | Likely Outcome |
|---|---|
| LVR below 80% | Easier approval |
| LVR above 80% | LMI or stricter assessment |
| Income reduced | Lower borrowing limit |
| Property value increased | More equity available |
Is Accessing Home Equity Difficult?
Accessing equity is straightforward if you meet lender criteria, but approval is not guaranteed.
Key Factors Lenders Assess
- Loan-to-Value Ratio (LVR):
- Above 80% → Higher risk, possible LMI or rejection
- Income stability:
- Reduced income → Lower borrowing capacity
- Credit history:
- Poor credit → Lower approval chances
- Property valuation:
- Higher value → Increased accessible equity
Simple Breakdown
| Situation | Likely Outcome |
|---|---|
| LVR below 80% | Easier approval |
| LVR above 80% | LMI or stricter assessment |
| Income reduced | Lower borrowing limit |
| Property value increased | More equity available |
How Home Equity Changes Over Time
Equity is a dynamic thing. It depends on market conditions and your actions.
When Equity Goes Up:
- You make regular or extra repayments on the loan
- Rising property values
- You own the property long-term
When Equity Declines:
- You refinance and extract equity
- Property prices tumble
- You extend your loan or take on debt
5 ways to build equity faster
- Make additional repayments when you can
- If you can afford it, choose shorter loan terms
- For non-essential spending, don’t refinance often
What Can You Do With Released Equity?
Releasing equity from your home gives you access to funds without selling. Here are two common uses:
Example 1 – Home Renovation:
Release $100,000 in equity at 6.00% p.a. – approximately $611/month in additional repayments. A well-planned renovation could add $150,000 or more to your property’s value.
Example 2 – Investment Property Deposit:
Release $120,000 to use as a 20% deposit on a $600,000 investment property – avoiding LMI on the new purchase entirely.
Speak to a broker before releasing equity to ensure the additional debt is serviceable alongside your existing commitments.
Home Equity – To Use or Not To Use?
Using equity can be beneficial, but only if it is done with a clear financial objective.
Equity: Good Uses
- Improvements that add value to your house
- Income producing assets (e.g. rental property)
- How to pay off high-interest debts
Uses of Risky Equity
- Buying assets that depreciate (cars, gadgets)
- Funding lifestyle upgrades or holidays
- Covering current living expenses
The basic principle is simple:
Use equity to build wealth or cut expenses, not fund spending.
Conclusion
Home equity is one of the most powerful financial tools available to homeowners, but it has to be used strategically. It can create opportunities like investing and improving your property, but it also increases your overall debt and financial exposure.
You should know before you tap into your equity:
- How much you can realistically borrow from
- How long-term impact on repayments affects
- Purpose monetary value
Helping Australians to find equity release home loans through competitive lenders with fast approval processes.
Call us on +123 456 7891 or make an online enquiry to speak with one of our experienced mortgage brokers.
