What Is Equity, How Can It Be Used?

Equity is a common term we hear in conversation relating to mortgages and investment. Whilst many people have a brief understanding of what equity is, it's important to know both what equity is and how to get the most from your available equity.

Lets just say you are paying off a mortgage on a $400,000 property, and are half way through paying it off. Therefore you currently own half of your property or home and the bank owns the other half in effect, your share is currently worth $200,000 and the banks or lender is the same.

Now lets look at equity and how to use it, or how much of it you can us. As shown above, you have $200,000 invested in your property. If you were looking at refinancing your mortgage or home loan and using the extra funds for a worthwhile cause, accessing your home equity. To avoid paying high levels of LMI (Lenders Mortgage Insurance) you want to keep your LVR (Loan To Value Ratio) below 80%. In this example 80% of $400,000 works out to be a new mortgage of $320,000.

Working on this figure, you had $200,000 of home equity. The new loan is $320,000, so to keep the LVR below 80% you need to have $80,000 of equity in you home, simply deduct this from your $200,000 and your left with $120,000 to spend or invest etc.