As we mentioned, home equity is calculated by subtracting the amount you still have to pay on your home loan from your property value. This allows you to assess how much of the property you own outright. 

But things don’t stop there. Unfortunately, you can’t use the entire amount available in equity to fund home improvements or secure your next property investment. 

That’s because you can only tap into the ‘useable equity’ in your property. Generally speaking, most banks will only let you draw down on up to 80% of your investment property’s value (minus any debts you owe on your current home loan).

To figure out how much useable equity you have in your property, use this formula:

• 80% of your home’s value - your outstanding loans = useable equity

Let’s go back to our previous example. Your property is valued at $900,000, which means most banks will lend up to $720,000 (or 80% of your property’s value). 

Since you have $300,000 remaining on your home loan, you’d have $420,000 in useable equity available from this property. 

However, there are more costs and fees you need to consider and factor in, especially when securing a new property using equity. Make sure to budget for additional expenses like stamp duty, legal fees, conveyancing costs and even mortgage registration fees to ensure you have enough equity to fund your next property purchase. 

So, how do you access the equity in your current home or investment property? First up, you’ll need to get a formal property valuation done by the lender you’re thinking of working with to assess the current market value of your home.

From there, you’ll have an accurate understanding of how much usable equity you have in your property. 

To access this equity, you’ll need to refinance your home loan (either with your current lender or with a new lender, who may be able to offer you better loan features and interest rates). 

If you want to access more than 80% of your property’s value, you can consider taking out things like Lender’s Mortgage Insurance (LMI). This is a kind of insurance that protects the bank in case you’re not able to repay your loan. Make sure to weigh up the pros and cons of LMI to ensure you can justify this extra upfront expense. 

If you want to increase the amount you can borrow, your other option is to boost the amount of equity in your current property by:

• Reducing your debt: the more you pay back on your mortgage, the more you’ll have built up equity in your home. So, consider if there are ways to repay your current loan faster (such as increasing your repayment frequency or making extra payments). Be sure to check with your current lender as there may be rules preventing you from paying back your loan faster.
  
• Increasing the value of your home: by conducting value-adding renovations, you can improve the market value of your home and boost your equity. Make sure to budget for these renovations carefully and ensure you’re focusing your time and money on the right areas of your home.