If your home has increased in value or you have paid down a good portion of your mortgage, you may have built up equity. That can create options, but it does not necessarily mean the full amount of that equity is available to borrow.
When you apply to borrow more money, a lender generally looks at both the property and your ability to manage the additional debt. This means two homeowners with a similar amount of equity could still have quite different borrowing options.
What is home equity?
In simple terms, equity is the difference between the value of your property and the amount you still owe against it. For example, if a home is worth $800,000 and the mortgage balance is $400,000, there is $400,000 of equity on paper.
However, lenders do not usually treat all of that amount as available borrowing. They may require you to retain a certain level of equity in the property, and lending criteria can vary depending on the purpose of the loan and your circumstances.
Your ability to service the loan still matters
Even where there is plenty of equity, a lender will generally assess whether your income can support the proposed repayments alongside your existing commitments and everyday expenses.
Existing loans, credit card limits, dependants, household costs and other financial commitments can all form part of that assessment. Lenders may also test repayments at an interest rate above the rate you would actually pay to allow for the possibility that borrowing costs change.
The reason for borrowing can make a difference
What you plan to do with the money can also affect how an application is assessed. Borrowing for renovations, purchasing another property, consolidating debt or another purpose may each involve different considerations.
The property itself can matter too. A lender may consider its value, the amount already secured against it and whether an updated valuation is required before deciding how much additional lending it is comfortable providing.
Equity is only one part of the picture
It can be tempting to look at an estimated property value, subtract the mortgage and assume the difference is available to use. In practice, borrowing capacity is usually a combination of available equity, income, expenses, existing debt and the lender's criteria at the time.
If you are considering using equity for another financial goal, a mortgage adviser can help you understand how lenders may assess your position and what borrowing options may be available before you make any commitments.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
