Investment loans
Usable equity explained: how to work out what you can tap
Usable equity is what you may borrow against your home, around 80% of its value minus what you owe. See the formula, a worked example and how lenders assess it.
Usable equity is the portion of your home equity a lender will typically let you borrow against, usually up to 80% of your property’s value minus what you still owe. It is not the same as your total equity. Knowing the difference is the first step to understanding whether you could use the value already built up in your home to help fund your next move, such as an investment property or a renovation.
This guide walks through what usable equity means, how lenders tend to calculate it, a worked example, and the questions to ask before you act. Whether any of this is available to you depends on your circumstances and lender criteria, so treat the figures here as a way to understand the concept rather than a quote.
What is equity, and what makes it usable
Equity is the share of your property you actually own. According to Moneysmart, it is the difference between your property’s current market value and the amount you still owe on your home loan. If your home is worth $800,000 and you owe $400,000, your equity is $400,000.
Usable equity is narrower. Lenders rarely let you borrow against every dollar of equity, because they keep a buffer between your total loan and the property’s value. That buffer is measured by the loan-to-value ratio.
The loan-to-value ratio (LVR) compares the size of your loan to the value of the property. Moneysmart gives a clear example: if you borrow $450,000 to buy a $600,000 home, your LVR is 75%. Lenders generally prefer to keep your borrowing at or below 80% of the property’s value. Above that line, Moneysmart notes that if your LVR is above 80% you may need to pay lenders mortgage insurance.
So when people ask how much usable equity do I have, they are really asking how much they can borrow before they cross that 80% line.
The usable equity formula
The usable equity formula most lenders work from is straightforward:
Usable equity = (80% of your property’s current value) minus the amount you still owe.
It helps to read it as two steps. First, take 80% of the property’s value to find the most a lender will usually lend against it. Second, subtract your remaining loan balance. What is left is the equity you may be able to access.
This is a rule of thumb, not a promise. Some lenders may lend beyond 80%, but Moneysmart points out that borrowing a larger share of the property value can mean extra costs such as lenders mortgage insurance, which is a one-off fee that protects the lender if you cannot repay the loan and does not protect you or your guarantor. Whether a lender will go above 80% in your case depends on your circumstances and their criteria.
A worked example
Say your home is valued at $800,000 today and you still owe $300,000.
- Work out total equity. $800,000 minus $300,000 is $500,000.
- Find the most a lender will usually lend against the property. 80% of $800,000 is $640,000.
- Subtract what you still owe. $640,000 minus the $300,000 you owe leaves $340,000 of usable equity.
In this example your total equity is $500,000, but your usable equity is around $340,000. The gap exists because the lender holds back the top 20% of the property’s value as a buffer. If you wanted to borrow above that buffer, lenders mortgage insurance could come into play, since borrowing more than 80% of the value is the point at which it may apply.
| Measure | How it is worked out | This example |
|---|---|---|
| Total equity | Property value minus what you owe | $500,000 |
| Usable equity | 80% of the value minus what you owe | $340,000 |
A current, independent valuation matters here, because the whole calculation rests on the property’s value. The number you assume and the number a lender’s valuer arrives at can differ.
Usable equity depends entirely on the property’s value, so the figure rests on a current valuation. The amount you estimate and the amount a lender’s valuer arrives at can differ, which changes how much equity is available.
What you might use usable equity for
People commonly look at usable equity to fund a deposit on an investment property, to renovate, or to consolidate borrowing. If you are weighing up an investment purchase, our investor home loans overview covers how lenders look at investment lending and what to think about before you commit.
Using equity rather than cash savings can be appealing because it may avoid the need to save a fresh deposit. Moneysmart notes that a common savings goal for a home deposit is 20% of the purchase price, and that a 20% deposit can avoid the need to pay lenders mortgage insurance. Equity drawn from your existing home can play a similar role to that cash deposit, though it adds to your total borrowing and the same LVR and insurance rules apply to the new lending.
How lenders assess an equity release
Having usable equity on paper does not by itself mean a lender will release it. A lender still assesses the new borrowing on its merits, looking at your income, expenses, existing debts and the purpose of the funds. Approval and the amount available depend on your circumstances and lender criteria.
A mortgage broker can help here. Moneysmart describes a mortgage broker as someone who deals with banks or other lenders to arrange a home loan, and who can work out what you can afford to borrow and find options to suit your situation. Different lenders set different limits and conditions, so the usable equity one lender offers may not match another.
If you want a sense of borrowing capacity before you talk to anyone, try the borrowing calculator to estimate a starting figure.
Try the borrowing calculator
Open the calculator to run your own numbers.
How usable equity connects to LVR and LMI
Usable equity, LVR and lenders mortgage insurance are three views of the same 80% line.
- LVR is your loan as a share of the property’s value. For more on this, see what is LVR.
- Usable equity is what you can borrow before LVR passes 80%.
- LMI is the cost that may apply if you borrow past 80%. See what is lenders mortgage insurance and how to avoid LMI for detail.
If you are thinking about an investment purchase while keeping your current home, rentvesting is another structure worth understanding alongside equity release.
Rentvesting first home buyerFrequently asked questions
Frequently asked questions
How much usable equity do I have? As a guide, take 80% of your property’s current value and subtract the amount you still owe. The result is the equity you may be able to borrow against. The exact amount available depends on a lender’s valuation, your income and expenses, and that lender’s criteria.
What is the usable equity formula? Usable equity equals 80% of your property’s value minus your outstanding loan balance. The 80% reflects the loan-to-value ratio most lenders prefer to stay at or below. Borrowing above 80% may trigger lenders mortgage insurance.
Is usable equity the same as my total equity? No. Total equity is the property’s full value minus what you owe. Usable equity is smaller because lenders generally hold back the top 20% of the value as a buffer, so you cannot usually borrow against your entire equity.
Does using equity mean I will pay LMI? Not necessarily. If your total borrowing stays at or below 80% of the property’s value, lenders mortgage insurance may not apply. If the new lending pushes you above 80%, it may apply, because Moneysmart notes LMI may be required when your LVR is above 80%.
Will a lender definitely release my usable equity? No. Having usable equity does not guarantee access to it. A lender assesses the new borrowing on your income, expenses and circumstances, and the outcome depends on lender criteria.
Talk it through with the team at Finance Lab
Usable equity is a useful concept, but the figure that matters is the one a lender will actually work with, based on a current valuation and your full situation. If you would like to understand what your equity could mean for an investment purchase or a renovation, the team at Finance Lab can walk you through it and compare options across lenders.
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