Loan Tip: Useable Equity

‘Useable Equity’ is a loose term used to describe how much you could potentially borrow against a property that usually has other loans secured against it.

People generally confuse equity with usable equity. You cannot borrow up to all the equity as the lender will want to maintain a 90% or 80% LVR to allow for a buffer if they have to take possession of the security property and sell it to recover their money lent.


Example

Homer has a property worth $500,000 and a loan of $350,000 secured against it. There is equity of $150,000.

But that does not mean he could borrow an extra $150,000 and that is because lenders will only lend up to 90 or 80% of the property value.


Useable Equity is worked out using this formula

(value x LVR%) minus existing loans


In the example above Homer’s useable equity would be, if he doesn’t want to pay LMI:

$500,000 x 80% = $400,000

Less the $350,000 in existing loans

= $50,000

 

Hi Terry,
When it comes to property owned in a company, are companies able to extract equity in the same way that an individual can? Assuming they can demonstrate serviceability etc

 

Yes, any owner can borrow against their property if they can service and otherwise qualify.