Glossary
Equity
Also called: property equity, home equity
Equity is the part of a property's value that is not owed to a lender. It is worked out by taking the property's current value and subtracting the balances of every loan secured over it. Lenders treat equity as a buffer that protects them, and borrowers often use it as security for further borrowing.
An example
An owner's home has been valued by a lender, and the existing mortgage balance is well below that value. The difference is the owner's equity. A second lender might lend against part of it, leaving some equity untouched as a buffer.
Why it matters
Equity is not cash. Borrowing against it adds debt and repayments, and a fall in value or rising capitalised interest can reduce it quickly. Lenders use their own valuation, so your estimate of equity may differ from theirs.
Points to check
Use the lender's valuation, not an online estimate, when working out how much equity you have. Subtract every loan secured on the property, including any redraw or undrawn limit. Before borrowing against equity, check the new repayments fit your income in a slow month, and leave a buffer for selling costs and a fall in value. Ask whether your existing lender must consent to another loan on the title.
Try it: LVR and loan-to-cost calculator