What is home equity and how can you use it?
Home equity is the difference between what your home is worth and what you owe. If you own a home, chances are you’ve already built up quite a bit of equity. Here’s how it works, how to calculate it, and how you could use it.
May 31, 2023 • Last updated May 08, 2026 • 12 min read
Key Takeaways
- Home equity is the difference between your property’s value and your remaining loan balance.
- You can access equity by increasing your loan, subject to lender limits and approval.
- Equity can be used for investing, renovating, or consolidating debt.
- Using equity increases your loan, which means higher repayments and interest over time.
- Building equity comes down to paying down your loan and increasing your property’s value.
What is home equity?
Home equity is the difference between your property’s current market value and the amount you still owe on your home loan. This is often referred to as the equity in your property. As you pay down your loan or your property increases in value, your equity grows.
For example, if your home is currently worth $450,000 and your home loan balance is $350,000, then you have $100,000 of equity in your home. On the flip side, if the value of your home ever drops, your home equity will also suffer.
How does an equity loan work?
Borrowing against home equity means using the value you’ve built in your property as security to access more funds. This type of borrowing is sometimes called an equity release loan or equity mortgage. It’s usually done by increasing your existing home loan or refinancing to a larger loan.
Most lenders will allow you to borrow up to 80% of your property’s value without additional costs. In some cases, you may be able to borrow up to 90%, but this typically involves paying Lenders Mortgage Insurance (LMI).
Using home equity means increasing your loan balance, so it’s important to consider the purpose of borrowing and ensure your budget can support the additional repayments, including the possibility of higher interest rates.
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How to calculate equity for your home
Use this easy formula to calculate equity for your home:
Equity = Property value – Outstanding loan balance
To estimate your equity:
- Find your property value: Base this on recent sales in your area or get a professional valuation.
- Check your loan balance: This is the amount you still owe on your home loan.
- Subtract the loan from the value: The difference is your equity.
Example:
How can you use your home equity?
Home equity can be used in a few different ways, depending on your goals. Most commonly, it’s used to fund large expenses or help you build long-term wealth.
As Sam Kapoor, Mortgage Broker at Tiimely Home, explains:
“Home equity can be a financial tool that may help you work towards long-term goals. It can be used to fund upgrades, invest in property, consolidate higher-interest debt, or provide a buffer for future needs.”
A deposit for an investment property
Using your equity as a deposit can help you buy an investment property sooner, without needing to save a full cash deposit. If you’ve saved for a home loan before, you’ll know how long it can take to reach the standard 20%, especially when it’s balanced with the ongoing costs of owning a home.
By tapping into your equity, you can move forward sooner and start growing your property portfolio, while continuing to repay your existing loan.
Renovating your current property
Renovating your current property can help to increase your property’s value, and further increase your home equity. Using your current equity to pay for your renovation is a great way to improve your home without needing to dip into your savings. This approach can make it easier to build equity over time, giving you more flexibility when you’re ready to borrow again or explore investment opportunities.
Purchasing a car
Using equity can help fund a car purchase at a lower interest rate than many standard car loans. Car loans can come with relatively high interest rates, and buying a car outright with your savings isn’t always an option. Tapping into your equity can give you access to funds upfront, without needing to rely on savings or higher-interest credit options.
Consolidating your debt
Equity can be used to combine multiple debts into your home loan, which may reduce your overall interest rate and simplify your repayments into one. Personal loans, car loans, and credit cards often come with relatively high interest rates and fees, so having multiple credit lines can mean you’re paying more than you need to.
That said, home loans typically run over much longer terms, which means you could end up paying more interest overall, even if the rate is lower. There might be other scenarios to consider unique to your situation, which we recommend seeking professional financial advice before jumping in when consolidating your debt.
Ways to increase your home equity
Building equity over time can give you more options in the future. Here are some common ways to grow it:
- Make principal and interest repayments: Paying down both the loan amount and interest helps reduce your balance faster. You can learn more about principal and interest loans in our guide.
- Pay more than your minimum amount: Even small extra repayments can reduce your loan balance and the interest you pay over time.
- Renovate to add value to your home: Improvements that align with your local market can increase your property’s value and your equity.
- Consider refinancing: Refinancing may help you access equity or secure a better rate, but it’s important to factor in any fees or costs involved.
As Sam Kapoor from Tiimley Home’s mortgage broker service explains:
Equity generally grows through a mix of reducing your loan balance and an increase in property value. This can be achieved by making extra repayments when possible, staying consistent with repayments, doing smart value-adding renovations, and buying in areas that show strong long-term growth potential.
Points to consider before using your home equity
Using your home equity can be useful, but it also increases your loan amount. This means higher repayments and potentially more interest over time, so it’s important to plan carefully.
- Make sure you can manage the increased debt: Check your budget and make sure you can comfortably handle higher repayments.
- Account for costs and fees: Refinancing and accessing equity may involve lender fees and government charges.
- Seek professional advice: A broker or financial adviser can help you understand your options and risks.
- Do your research: Come prepared with questions so you can discuss how using equity will impact your loan long term.
At Tiimely Home, we take the time to explain your options clearly, so you can feel confident in the decisions you’re making. Ready to get started? Apply for a digital home loan or book a call with a mortgage broker.
FAQs
How do I access my equity?
You can access your equity by increasing your existing home loan or refinancing to a larger loan. This is often called a “cash-out refinance” or equity release loan.
Most lenders allow you to borrow up to 80% of your property’s value (or up to 90% with LMI), subject to approval and your ability to service the loan.
Can you use equity to pay off a mortgage?
Yes, you can use equity to pay off a mortgage, but it usually means refinancing or restructuring your current loan. This doesn’t remove the debt, it shifts or increases it, so it’s important to consider the long-term impact on your repayments and interest.
How does equity work when buying a second home?
When buying a second home, you can use equity from your existing property as a deposit. This allows you to borrow without needing a full cash deposit, as long as you meet your lender’s borrowing and serviceability requirements. Your borrowing power will be influenced by different factors and expenses.
What’s the difference between equity and LVR?
Equity is the difference between your property’s value and your loan balance. LVR (Loan to Value Ratio) is the percentage of your property’s value that you’ve borrowed. Lenders use LVR to determine how much you can borrow and whether additional costs like LMI apply.
How to get equity out of your house?
To get equity out of your house, you’ll need to refinance or increase your home loan. The amount you can access depends on your property value, current loan balance, and your lender’s borrowing limits—usually up to 80% of the property value without LMI.
What is accessible equity?
Accessible equity is the portion of your total equity that you can actually borrow against. Lenders set limits based on your Loan to Value Ratio (LVR), your financial situation, and what the funds will be used for.
For example, if your lender allows borrowing up to 90% of your property value and your home is worth $500,000, the maximum loan would be $450,000. If you currently owe $400,000, you may be able to access up to $50,000 in equity—subject to approval.
