Equity vs borrowing power: why they differ
Equity is the difference between your property value and the debt secured against it. Borrowing power is the amount a lender assesses you can repay. A home can have substantial equity while its owner has little capacity for extra repayments. Ratey can estimate equity from a property value and loan balance; a lender must separately assess your income, expenses, debts and application before approving additional borrowing.
By Ratey · General information for Australian borrowers.
Worked example: $380,000 equity does not mean $380,000 to spend
A property estimated at $900,000 with a $520,000 loan has $380,000 total equity. Its LVR is about 57.8%. Using Ratey’s 80% assumption gives $720,000 minus $520,000, or $200,000 indicative usable equity.
Suppose the owner wants an $80,000 renovation loan. If a lender approved that amount, total debt would become $600,000 and LVR would be about 66.7%, assuming the same valuation and no financed fees. The security calculation fits within the example’s 80% assumption. It still says nothing about whether the owner can service $600,000 of debt.
Two owners with these same property figures could receive different lending decisions because their income and commitments differ. No borrowing-capacity amount has been inferred from an income multiple in this example.
Start with two separate questions
Ask how much security the property may provide, then ask whether your household can carry the proposed debt. Passing the first test does not answer the second. A higher property estimate changes the security calculation without putting more income into your bank account.
This distinction matters when a renovation quote or next-home deposit looks smaller than the equity figure on your dashboard. Write down the actual new borrowing you need, including costs, before using the equity figure as a spending budget.
Total equity and usable equity are different figures
Ratey calculates total equity as property value minus loan balance. Its indicative usable-equity figure is the greater of zero and 80% of property value minus the loan balance. The 80% assumption is a planning convention in this calculator, not a commitment from any lender.
For an application, use the value accepted by the lender and include all debt secured by the property. An online estimate, an agent appraisal and a lender valuation may differ. Selling costs are not deducted from Ratey’s equity calculation, so total equity also differs from cash you might receive after a sale.
What sits on the repayment side
A lender assesses income, living costs and debt commitments. APRA’s residential mortgage guidance also addresses repayment buffers and adjustments for uncertain income. That is why comparing your current repayment with your salary does not reproduce a credit assessment.
Prepare two budgets for your own decision: current household cash flow and cash flow after the proposed loan. Include expenses that arrive quarterly or annually. A loan approval and a comfortable household budget answer related questions, but you still need to consider your own cash reserve and upcoming plans.
Find out which part is limiting the application
Ask the lender or broker to explain whether the constraint is valuation, acceptable security, income, expenses, existing debt or another policy requirement. This makes the next action specific. A new valuation will not necessarily solve a repayment shortfall; a smaller project may reduce both the new debt and its repayments.
Avoid treating a maximum figure as a target. Compare the amount needed for the project with the resulting debt, repayment, fees and remaining cash. If a quote changes, rerun that smaller decision rather than assuming the original equity estimate has reserved money for you.
- If the property value is uncertain, ask how it will be established for this application.
- If income has changed, gather current evidence before relying on a previous borrowing estimate.
- If extra debt is the constraint, compare a smaller amount and a later start date.
Your next-step checklist
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Common questions
Can I withdraw equity like money from an account?
Equity is part of the property’s value. Accessing it through a larger loan requires borrowing and approval. Money already held in an offset is a separate account balance.
Does property growth automatically increase borrowing power?
It can change the security position, but it does not automatically improve your ability to meet repayments. The lender assesses the proposed loan separately.
Is the usable-equity estimate a pre-approval?
No. It applies a stated property-value assumption and arithmetic. It does not assess income, expenses, credit history or a lender’s policies.
Sources and assumptions
These primary sources support the explanations above. Examples use invented figures to show the calculation or decision; they are not available loan offers. Check your lender’s terms for your circumstances.
Calculations are estimates and do not establish borrowing eligibility. Read the calculation methodology.
Check the property side first
See total equity, indicative usable equity and LVR from your own figures.