Your Home Has Grown in Value. What Can You Actually Do With the Equity?
If you've got a mortgage, car loan, credit card and maybe a personal loan, it can start to feel like money is disappearing in every direction.
And maybe you do.
But what does that actually mean?
Can you use it for renovations? Another property? School fees? A car? Your business? A buffer?
And probably more importantly: should you?
Home equity can create some really useful options for homeowners, but it isn’t free money sitting in an account waiting to be spent.
If you access it, you are generally borrowing more money against your property. That means your loan balance can increase, repayments may increase and you’ll generally pay interest on whatever additional funds you actually use.
So rather than starting with: “How much equity can I get?” I think the better question is: “What am I trying to achieve, and does using some of my equity make sense financially and for the lifestyle I’m trying to create?”
What is home equity — and how much of it can you actually use?
At its simplest, your equity is the difference between what your property is worth and how much you still owe against it.
Say your home is worth $1,000,000 and your mortgage balance is $500,000. Your total equity is approximately $500,000.
But that does not mean you necessarily have $500,000 available to borrow. This is where usable equity comes in.
As a general guide, many lenders will lend up to around 80% of a property’s value without Lenders Mortgage Insurance (LMI), subject to valuation, servicing and lender policy. Borrowing above 80% may still be possible in some circumstances, but LMI and/or additional lender requirements or costs may apply.
Simple example
Property value: $1,000,000
80% of property value: $800,000
Less existing mortgage: $500,000
Potential usable equity: approximately $300,000
This is before considering borrowing capacity, lender policy, costs and what the funds will be used for.
Having $300,000 of potential usable equity does not automatically mean a lender will let you borrow $300,000. They still need to be satisfied that you can afford the additional lending.
Equity tells us what may be available against the property. Borrowing capacity tells us how much you may actually be able to access.
Your broker can help work both of those out.
Having equity doesn’t mean you need to use it
Discovering that you have $100,000, $200,000 or more of potential usable equity can suddenly make lots of ideas feel possible.
But you do not have to use it.
If you do, I generally like there to be a clear benefit behind taking on the extra debt.
For most households, that benefit falls into three areas.
1. Using equity to improve your lifestyle
Sometimes using equity isn’t about creating an investment return. It is about improving your life.
• renovating your existing home
• essential home repairs
• a vehicle
• private school costs
• creating a temporary financial buffer
• another significant family expense
The important thing is understanding what the additional borrowing means. If you borrow another $50,000, what does that do to your repayments? How long do you want to take to repay it? Does the lifestyle benefit justify the additional debt?
Renovations are a good example. If you are improving the home you already own and intend to hold long term, that additional lending can usually sit with your existing owner-occupied home-loan debt rather than needing a separate split purely because it was used for renovations.
Your broker can work through the most practical structure with you.
2. Using equity to build your financial position
Equity can also potentially help create future wealth.
• buying another property
• an investment-property deposit and purchasing costs
• investing in or growing a business
• funding an opportunity that may improve future income
• helping an adult child enter the property market
This is where the purpose of the borrowing becomes particularly important.
If funds are being borrowed for an investment purpose, it can be useful to keep that lending in a separate loan split from your personal home-loan debt. That makes it much easier to clearly identify what the borrowed funds were used for and can make record keeping far cleaner.
Your accountant should advise you on any tax implications, and your broker can work alongside them to help structure the lending appropriately.
3. Using equity to improve household cash flow
Another common reason homeowners access equity is to restructure other debts, such as credit cards, car finance, personal loans or other higher-interest debts.
That may allow those debts to be consolidated as part of your home lending, potentially reducing the household’s overall required repayments.
In this situation, I usually like the consolidated debt kept visible as its own split — for example, your existing home loan plus a separate debt-consolidation split.
That debt-consolidation split can potentially be set over a shorter term rather than simply disappearing into a 25- or 30-year mortgage. This gives you a clearer plan for actually getting rid of it.
The aim is not just to make this month’s repayment smaller. It is to improve cash flow and build a sensible path towards becoming debt free sooner.
Do I have to start paying interest on the whole amount immediately?
Not necessarily — and this is something worth discussing with your broker when the lending is being set up.
Depending on the lender and structure, you may be approved for an additional amount but only pay interest on funds once they are actually drawn and used.
For example, some structures may allow funds to remain available through redraw until you need them. If the funds are genuinely undrawn, interest is generally only charged on the amount actually borrowed.
Another option may be to have funds advanced and held in an offset account. An offset account reduces the portion of the linked home loan balance on which interest is calculated. So if borrowed funds are sitting untouched in a fully effective offset, the interest impact may be reduced while those funds remain there.
The exact repayment requirements and way interest is calculated vary between lenders and loan products, so this is something your broker should confirm before the loan is set up.
How should additional lending be split?
You do not necessarily need a separate loan account for every single thing you ever spend money on. The idea is to keep the structure clear and purposeful, not complicated.
• Existing home-loan / personal home debt: Your main owner-occupied mortgage, including funds used for renovations or improvements to that home where appropriate.
• Personal-purpose or debt-consolidation split: For consolidated consumer debt or another significant personal expense where keeping it separate makes repayment tracking easier.
• Investment-purpose split: For funds borrowed specifically for an investment property or another investment purpose, which can help keep personal and investment borrowing clearly separated for record keeping and tax discussions with your accountant.
The right structure depends on why you are borrowing, how quickly you want to repay it and what you are trying to achieve.
This is exactly the sort of thing your broker can help you work through, including what each option could mean for your repayments, longer-term interest cost and day-to-day lifestyle.
What will accessing equity actually cost?
This is probably more important than how much equity you have technically got.
If you discover that you could potentially access $300,000, that does not mean you have $300,000 to spend.
What it really means is that you may have the capacity to borrow additional money against your property.
So instead ask: “If we borrowed $50,000 for what we actually need, what would that do to our repayments and would the benefit be worth it?”
Your broker can model different scenarios for you. Sometimes that conversation leads to borrowing less than you originally thought. That is still a good outcome.
Before accessing your equity, ask these six questions
1. What exactly are we using the money for?
Be specific. “Accessing some equity” is not really a plan. “$60,000 to renovate our kitchen and bathrooms” is.
2. What benefit are we getting?
Is it lifestyle, financial or cash-flow related? Knowing the benefit makes it easier to judge whether the extra debt is worthwhile.
3. What will the new repayment be?
Your broker can model this before you decide. Ot you can use our handy repayment calculator to guide you.
4. How long should this debt reasonably exist?
Different purposes deserve different repayment strategies.
5. What happens if income or rates change?
You still want the overall household position to remain manageable.
6. Is borrowing against the home actually the best option?
Sometimes it is. Sometimes another structure is better. Sometimes waiting makes more sense.
What do I need before speaking to my broker?
Not much. Have a rough idea of:
• what your property may be worth
• your current mortgage balance
• household income
• other debts
• approximately how much you need
• what you want to use the money for
Then let your broker do the hard work.
At Rockett Finance, we can help calculate your potential usable equity, understand your borrowing capacity and model what different options may actually look like.
We can also help you work through loan structure, separate loan splits where appropriate, repayment options, redraw and offset options, interest-only options where suitable, the effect on your overall repayments, and how the lending fits your lifestyle and longer-term financial goals.
How Rockett Finance can help
If your home has increased in value and you are wondering what that might allow you to do, you do not need to work out all the numbers yourself first.
At Rockett Finance, we can look at your estimated property value, existing mortgage, borrowing capacity and what you actually want to achieve.
Then we can help you understand how much usable equity you may have, how much you may actually be able to borrow, when interest would start being charged, what your repayments could look like, whether different loan splits make sense, whether redraw, offset or interest-only options may be appropriate, what it could cost over time, and what it means for your household financially and for your lifestyle.
Maybe it is renovating the home you already love. Maybe it is creating a buffer through a temporary expensive stage of life. Maybe it is tidying up debt. Maybe it is investing. Maybe it is backing your business. Or maybe once you have seen the numbers, you decide you do not need to use the equity at all.
Equity creates options. Your broker’s job is to help you understand which of those options actually makes sense for where you are going next.
If you are wondering what your home’s equity could help you do, Book an Appointment with Your Broker (that’s us!) to determine what options you might have.
We’re here to help you through all stages of life (& debt), and our appointments are complimentary!
Your Broker,
Tara
Frequently Asked Questions (FAQs)
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It depends on your property value, existing loan balance, borrowing capacity and lender policy. As a general guide, many lenders will lend up to around 80% of a property’s value without LMI, subject to their normal lending criteria.
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Potentially, yes. Available equity, borrowing capacity, credit history, the existing debts and lender policy will all matter. Your broker should also check any payout costs before recommending a refinance.
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Potentially, yes. Renovations and home improvements are common reasons homeowners access equity.
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Potentially. Depending on how the loan is structured, you may be able to have funds available through redraw or held in an offset until needed. The interest and repayment treatment can differ depending on the lender and structure, so discuss this with your broker before setting it up.
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Potentially. Equity may be used towards an investment-property deposit and purchasing costs, subject to borrowing capacity and lender requirements. Investment lending should also be discussed with your accountant regarding tax implications.
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Generally, using additional borrowed funds will increase the amount you owe and therefore usually increases the repayments or interest payable. The actual impact depends on how much is drawn, the rate, loan term and repayment structure.
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