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How does equity work?

Equity, is literally that part of the property that you own, ie:

· If your home is worth $1,000,000 and you owe $650,000 then your equity is $350,000 – you own that portion

· If the same property had no loan on it, then your equity would be the full $1,000,000

So equity, quite simply is the value of the property minus any loan you have on it = the part that you own.

Accessible equity

Now, accessible equity is quite different, this is the part of the property that you could access, or borrow against, to fund a project (like, renovations or buying another property).

Generally, you can’t borrow up to the full value of the property – lenders need to stick within certain ratios and for most borrowers who are accessing equity this is up to 90% of the property value.

So, using our example above –

· you already owe $650,000,

· the maximum loan you can have against that property is $900,000 (90%)

· and the difference between these is your potential accessible equity = $250,000

That’s a simplistic view, we need to meet lender approval criteria and we may have lenders mortgage insurance to pay from that – but you get the picture

Using your equity

There are only two ways to access or use your equity

1. Borrow against it

2. Sell the property and have the cash

This can be a bit challenging when we have all heard the expression “use your equity”, but not the mechanics of how we do so.

We hear “use your equity” to purchase an investment property – as an example – but not the mechanics that means you actually have to borrow against that equity – in essence, you can’t have your cake and eat it too (bad analogy but that’s how it is)

That doesn’t mean you can’t or shouldn’t access your equity, but it does mean if you’ve worked hard to pay that portion off, and you use it again – you’re going to have to pay it off again unless you literally sell to realise your equity. This seems a challenging concept but if you think about it you are technically “using” the money again, so that helps it make a bit more sense.

How do you “get” equity in your property?

Essentially, you’re paying your property off – and also, hopefully – the property appreciates or goes up in value, both of these create equity.

Borrowers daily are using their accessible equity to create wealth with property, or renovate their homes, clear their debts – basically enjoying the fruits of their labour, and that may be enough cliches for one article.

If you prefer your info in video, Brett has provided this fabulous insight

how does equity work


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