Many homeowners have a rough idea of what their property is worth, but fewer understand how the equity they’ve built up could support future financial goals.

Whether you’re considering renovations, upgrading, purchasing an investment property or simply exploring your options, understanding equity can be an important starting point.

Let’s take a closer look at how equity works and why it matters.

What is equity?

Equity is the difference between your property’s current market value, and your home loan balance. If your home is worth $900,000 and you owe $300,000, your total equity is $600,000. When you pay down your mortgage or your home increases in value, your equity increases.

While equity is often discussed as a single figure, not all of it may be accessible. As a general rule, lenders will typically allow borrowers to access up to 80% of a property’s value, less any outstanding mortgage balance. This is commonly referred to as usable equity.

Borrowing above 80% of a property’s value may incur Lenders Mortgage Insurance (LMI), which can add to the overall cost of borrowing.

How can you use equity?

For many homeowners, equity is more than just a number on paper. Depending on your circumstances, it could provide greater financial flexibility and help support a range of future goals.

Some people use equity to fund home improvements, such as a new kitchen, bathroom or outdoor entertaining area. Others use it to help purchase an investment property, invest in shares, cover education expenses or finance a major purchase such as a vehicle or boat.

In some cases, homeowners may also choose to use equity to consolidate existing debts. This typically involves increasing a home loan and using the funds to repay higher-interest debts, such as credit cards or personal loans, leaving a single regular repayment to manage.

However, debt consolidation isn’t suitable for everyone and comes with risks that should be carefully considered. Before accessing equity or making any borrowing decisions, it’s important to understand the costs, risks and long-term implications, and discuss your options with a qualified finance professional.

How does it work?

There are several ways homeowners can access equity. Some of the most common options include:

Top-up loan: This involves increasing your existing home loan and accessing additional funds as a lump sum, which can then be used for an approved purpose.

Separate loan split: Rather than increasing your current loan, you may be able to establish a separate loan account secured against your property’s equity. This can help keep borrowed funds for different purposes separate.

Refinancing: Refinancing involves replacing your current home loan with a new one. Depending on your equity position, this may allow you to borrow additional funds while also providing an opportunity to review your interest rate, loan features and overall lending arrangements.

Line of credit: A line of credit allows you to access funds as needed, up to an approved limit. Instead of receiving a lump sum upfront, you can draw on the facility over time and generally only pay interest on the amount used.

Key considerations

Using your home equity will generally increase both your total debt and your regular repayments, so it’s important to understand the impact on your budget before proceeding.

The right approach will depend on your goals and borrowing capacity. A mortgage broker can help you understand your options, estimate your repayments and assess whether accessing equity aligns with your objectives.

It’s also important to consider the risks. Interest rates may change over time, which could affect future repayment amounts. Because your property is used as security for the loan, failing to meet your repayments could put your home at risk.

That said, equity can be a valuable financial resource. Depending on your circumstances, it may provide a way to fund renovations, purchase an investment property, consolidate debt or achieve other financial goals without relying solely on savings.

How has the property market downturn affected equity?

Property prices and equity are closely linked. When property values rise, homeowners often build equity more quickly. When values fall, the amount of equity available may be reduced, particularly for those who purchased recently or borrowed a large proportion of a property’s value.

While national home values have declined in recent months, the impact on equity will vary from homeowner to homeowner. Those who have owned their property for several years and made regular mortgage repayments may still have substantial equity, even if market conditions have softened.

However, recent buyers who entered the market with smaller deposits may be more affected. In some cases, falling property values can lead to negative equity, where a property’s market value is less than the outstanding loan balance.

If you’re considering accessing equity, it’s important to understand your current position and how changing market conditions may affect your options. A mortgage broker can help assess how much usable equity may be available and whether accessing it aligns with your financial goals.

Next steps

Curious about how much equity you may have available? Get in touch for a review of your current position and a discussion about your future plans.

We’ll check the current market value of your home and give you an idea of your usable equity. Your chosen bank will likely want a valuation of your property, then we’ll run through your finance options and paperwork requirements.

Releasing your equity and making it work for you could help you achieve your financial goals, so it’s worth exploring. Reach out today.