What is home equity?

The formula

Home equity = property value − remaining loan balance. Say your home is worth $750,000 and you owe $480,000 on the mortgage: your equity is $750,000 − $480,000 = $270,000.

How equity grows

Two things drive it, and they work independently of each other. The first is paying down your loan principal, every repayment chips away at your balance, and extra repayments speed that up. A lower loan balance means more equity regardless of what's happening in the property market. The second is rising property values. If your $750,000 home climbs to $850,000 while your loan stays at $480,000, your equity jumps to $370,000 without you making a single extra repayment.

In a strong market, both drivers can compound together and equity can build quickly. But values can also fall, so equity is never a sure thing, it moves with the market as much as with your loan balance.

Total equity vs usable equity

This is the distinction that trips people up. Total equity is the full raw figure above, but lenders typically cap what they'll lend against a property at 80% of its value without requiring LMI. That means the equity you can actually put to work, your usable equity, is meaningfully smaller than your total equity.

Usable equity = (property value × 80%) − remaining loan balance. On that same $750,000 home with $480,000 owing: 80% of $750,000 is $600,000, minus the $480,000 loan leaves $120,000 in usable equity, less than half of the $270,000 total equity figure. Some lenders will go to 90% or even 95% LVR, but that triggers LMI, so weigh the cost carefully before borrowing above 80%. Our LVR (loan-to-value ratio) page covers how that threshold works in more detail.

Common uses

Home renovations. A well-planned renovation can also lift your property's value, building even more equity. Lenders will typically want quotes or a scope of works before releasing funds for this purpose.

A deposit for an investment property. Rather than saving a fresh cash deposit, you can release usable equity via an equity loan, line of credit or redraw facility and use it to fund an investment purchase. This is one of the most common equity strategies in Australia, our guide on using equity to buy an investment property walks through the full process, a worked example and the risks in detail. Check what you could realistically borrow with our Borrowing Power Calculator.

Debt consolidation. Rolling higher-interest debts, credit cards, personal loans, into your mortgage can lower your monthly repayments since mortgage rates are usually much cheaper. But it converts short-term debt into long-term debt secured against your home, and the total interest paid over 25 years can end up exceeding what the original debt would have cost you. Tread carefully here.

The risks

Borrowing against equity increases your total debt and your repayments, it isn't withdrawing savings, it's taking on more debt secured against your home. If property values fall after you've borrowed against your equity, you can end up in negative equity, owing more than the property is worth, which makes selling without covering the shortfall, or refinancing, difficult. And because equity can feel like an almost bottomless pool of accessible cash, it's easy to over-leverage, borrowing for lifestyle spending like a holiday or a car is a real temptation that can take years to unwind.

Three misconceptions worth clearing up

• Equity isn't cash in the bank. It's illiquid, locked into the property until you sell or borrow against it through a formal lending product.
• You can't access all of it. Lenders cap borrowing at 80% LVR in most cases, so your usable equity is typically much smaller than your total equity.
• Rising prices don't automatically mean you can borrow more. Lenders require a formal valuation, a bank valuation or an independent assessment, before releasing funds. An online estimate or a neighbour's recent sale price doesn't count.