Total and usable home equity.
Usable equity
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Total equity
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Current LVR
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Total equity and usable equity are not the same number
People often say a home is worth $900,000 with $450,000 owing, so there is $450,000 of equity to spend. The bank disagrees. Your total equity is indeed value minus loan, but a lender will not let you draw it all. They cap your total borrowing at a loan to value ratio, usually 80 percent, because above that they require Lenders Mortgage Insurance to protect themselves. Usable equity is the slice the bank will release without forcing LMI, and it is always smaller than your paper equity. This tool shows both so you do not walk into a broker meeting with the wrong figure.
The distinction matters because the two numbers serve different purposes. Total equity tells you your net wealth in the property, the amount you would pocket if you sold today after clearing the loan. Usable equity tells you your borrowing capacity against the property while you keep it. People who confuse the two tend to overcommit, assuming they can pull out the full paper figure, then get a smaller approval and have to restructure their plans. Knowing both before you talk to a lender keeps your expectations realistic.
The 80 percent rule in one line of arithmetic
Usable equity equals the property value times the maximum LVR, minus your current loan. The first term is the largest debt the bank is comfortable with at that property. Subtract what you already owe and you have the headroom they can hand over, typically as a new loan split or a line of credit. The default LVR in the calculator is 80 percent, the level at which LMI normally kicks in, but you can push the slider higher if you are willing to pay insurance to access more.
Pushing the LVR higher is a genuine option, not just a theoretical one. Some lenders will release equity up to 90 percent of value, but the LMI premium on that extra band can run into thousands of dollars and is calculated on the whole loan, not just the slice above 80 percent. Whether it is worth it depends on what the released equity will earn you. Borrowing to 85 percent to seize a strong investment can pay for the insurance many times over, while doing the same to fund consumption rarely does.
From equity to a deposit: a $900,000 home
Consider a Melbourne owner whose place is valued at $900,000 with $450,000 still owing. Their loan to value ratio today is a healthy 50 percent, so there is plenty of room. Here is how the numbers fall out at the standard 80 percent cap.
| Step | Amount |
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The owner can access $270,000, not the full $450,000 of paper equity. That $270,000 is often used as the deposit and costs on an investment property. The bars below make the gap obvious.
Who this helps, and the trap to avoid
This is built for owners thinking about a second property, a renovation, or debt consolidation, and for anyone wanting to know their position before a valuation. The trap is treating usable equity as free money. It is new debt secured against your home. If you draw $270,000 to fund an investment deposit, you have a larger mortgage and a single bank holding security over two properties through cross collateralisation, which can limit your flexibility later. Many investors deliberately keep the loans separate and with different lenders. Where the borrowed equity funds an income producing asset, the interest is generally tax deductible, but interest on the portion used for private purposes is not, so keep the splits clean for the ATO.
Frequently asked questions
Does using an offset account change my usable equity?
Money in an offset reduces the interest you pay but does not reduce the loan balance the bank sees, so it does not increase usable equity in this calculation. To lift usable equity you either pay the loan down for real or the property value rises at the next valuation.
How does the bank decide my property value?
Lenders order their own valuation rather than trusting a sale price or an online estimate, and they tend to be conservative. If the bank valuation comes in below what you expected, your usable equity shrinks accordingly, so it is wise to model a value slightly under your optimistic figure here.