How Home Equity May Be Used: Understanding Your Options

If you have owned your home for some time, changes in your property’s value and repayments made towards your home loan may mean you have built equity in the property. You may be wondering whether the equity in your home could be used to help fund an investment property, renovation, debt consolidation or another financial goal. Depending on your circumstances and lender requirements, accessing available equity may be an option.

Accessing available equity may provide funds towards certain property or lifestyle goals without requiring you to sell your current home. It also means increasing the debt secured against your property, so a clear plan matters.

What equity means in practical terms

Equity is the difference between your property’s current market value and the amount you still owe on your home loan.

For example, if your home is worth $900,000 and your loan balance is $500,000, you have $400,000 in total equity. That figure is a useful starting point, but it is not necessarily the amount a lender will allow you to borrow.

Lenders generally assess usable equity. An 80% loan-to-value ratio (LVR) is a commonly used benchmark when considering lending without lenders mortgage insurance, although requirements vary between lenders, products and individual circumstances. Using the same example, 80% of a $900,000 property is $720,000. Subtract the $500,000 loan balance and the potential usable equity could be up to $220,000, subject to lender assessment and other applicable criteria.

This does not mean you will automatically be approved for $220,000. Your income, existing commitments, living expenses, credit history and the purpose of the loan will all be assessed. Lenders must also consider whether you can comfortably manage the repayments, including under higher interest-rate assumptions.

Using equity towards another property purchase

Some homeowners may use available equity to help fund the deposit and purchase costs for another owner-occupied or investment property, subject to lender assessment and their financial circumstances.

Depending on the circumstances, the lending may be structured using separate loan splits. One split releases equity from your existing property for the deposit and costs, while a separate loan is secured against the property you are purchasing. Keeping these purposes separate may make the lending purposes easier to identify and manage.

Separate loan splits may also assist your accountant in identifying interest expenses associated with the investment borrowing. Tax outcomes depend on how borrowed funds are used, not simply on which property secures the loan, so it is sensible to seek personal tax advice before proceeding.

Using available equity towards a deposit may reduce the amount of cash required upfront, depending on the loan structure and lender requirements. Stamp duty, conveyancing, building inspections and other costs can be significant, and they differ between states and territories. It may also be appropriate to allow for a financial buffer for vacancies, repairs and interest-rate changes when purchasing an investment property.

A simple example

Suppose your existing home is valued at $1,000,000 and you owe $550,000. For illustration, if lending were assessed at an 80% LVR, this would equate to $800,000. After subtracting the existing $550,000 loan balance, there may be approximately $250,000 in potential usable equity, before costs and subject to lender assessment.

For example, a borrower might seek to use $180,000 of the available equity towards the deposit and purchase costs of a $700,000 investment property, with separate lending sought for the remaining purchase price. This is illustrative only. The actual structure and amount available would depend on lender policy, valuation, servicing and the borrower’s financial circumstances. However, approval still relies on your ability to service both the existing and new debts, not just on the equity available.

Using equity to renovate your home

Available equity may also be used to help fund a renovation, subject to lender assessment. This may suit homeowners who want more space, an updated kitchen or better functionality without the cost and disruption of moving.

The key question is whether the renovation supports your broader plans. A well-considered improvement may make your home more suitable for your needs and may add value, but not every project delivers a dollar-for-dollar return. Highly personalised finishes or overcapitalising for your suburb may limit the financial benefit.

For smaller projects, increasing an existing loan or using a redraw facility may be appropriate. Larger renovations may require a construction loan, where funds are released in stages as work is completed. The right approach depends on the project scope, your builder’s contract and your cash flow.

Before borrowing, obtain realistic quotes and allow room for variations. Renovations have a way of uncovering unexpected issues, particularly in older homes. Allowing for a contingency amount may reduce the need to rely on additional borrowing if costs increase.

Using equity when refinancing or consolidating debt

Refinancing with equity may be worth considering when your current loan no longer suits your needs. You might be seeking a more suitable loan structure, additional features, a more competitive rate or funds for a specific purpose.

Some borrowers use home equity to consolidate higher-interest debts, such as credit cards or personal loans. For some borrowers, consolidating higher-interest debts into a home loan may reduce required repayments or create a more organised repayment structure. Rolling short-term debt into a long-term home loan can mean paying interest for much longer unless you keep repayments high or set a clear repayment plan.

Where appropriate, a separate loan split may make the consolidated debt easier to identify and manage. The suitable structure will depend on the borrower's circumstances and lender requirements.

What lenders may consider when assessing an equity release

A property valuation is only one part of the assessment. Lenders will generally consider your financial position as a whole, including your employment or business income, household spending, other loans, credit limits and dependants.

They will also look at the loan-to-value ratio after the new lending is added. Borrowing above 80% may be possible in some circumstances, although lenders mortgage insurance may apply and lender options may differ. If your property value has fallen since you bought it, your potential usable equity may be lower than initially estimated.

For self-employed borrowers, income documentation can be more detailed and may include business financials and tax returns. For investors, lenders may apply different policies to rental income and existing portfolio debt. This is why an equity calculation from an online estimate is useful for planning, but not a substitute for a lending assessment.

The risks to weigh before using home equity

Equity is not cash in a savings account. Accessing it increases the amount secured against your home. If circumstances change and repayments become unaffordable, your property may be at risk.

Interest rates are another important consideration. Work out whether your budget could handle higher repayments, not only the rate available today. If you are purchasing an investment property, consider a period without rental income as well as maintenance, insurance, council rates and body corporate costs where relevant.

It is also worth considering your timeframe. Borrowing to purchase a long-term asset or complete a necessary renovation may align with your goals differently from borrowing for a depreciating purchase or ongoing living expenses. The purpose, additional repayments and overall borrowing commitment should be considered in the context of your circumstances and plans.

What to consider before accessing equity

Start by clarifying what you want the funds to achieve and how much you genuinely need. Then estimate your equity using a conservative property value and your current loan balance. Avoid committing to a purchase based solely on a high online valuation.

Next, review your household budget. Include all likely repayments, property costs and a realistic buffer. A borrowing capacity assessment may provide an indication of how lenders could assess your position, but it should also be a prompt to decide what repayment level feels sustainable for your family.

Finally, consider loan structure carefully. Separate splits for different purposes can provide clarity, especially when part of the borrowing is for an investment. Offset accounts, redraw facilities, fixed and variable rate portions may also be relevant, depending on your priorities and the available lender options.

A mortgage broker may help you understand your potential usable equity, compare relevant lender policies and consider the likely costs and lending requirements before proceeding. At Inspiration Lending, the focus is on understanding how an equity release fits with your property goals, your current commitments and the next stage you want to reach.

Your home may provide borrowing options beyond your existing home loan. Rather than focusing on the maximum amount potentially available, consider the amount you actually need, the resulting repayments, the purpose of the funds and how the additional borrowing fits with your broader financial circumstances and property goals.

Disclaimer

General information only and does not constitute credit advice. Your full financial situation and requirements need to be considered prior to any offer and acceptance of a loan product. Lending is subject to lender approval.

Inspiration Lending Pty Ltd Credit Representative 569537 is authorised under Australian Credit Licence Number: 389328 | ABN 20687381737.