Your home equity is the difference between your property’s market value and the balance of your mortgage. Simply put, home equity is the difference between the value of your property and the outstanding debt on your home loan. For example, if your home is worth $500,000 and the current debt on your home loan is $320,000, then your equity is $180,000.
If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity in your property. This can be a valuable resource when it comes to property investment.
80% of home equity refers to 80% of the difference between the market value of a property and the outstanding mortgage balance on it. In other words, if you have a property with a market value of $500,000 and an outstanding mortgage balance of $200,000, the home equity would be $300,000 ($500,000 – $200,000). To calculate 80% of the home equity, you would multiply the home equity amount by 0.8. In this example, 80% of $300,000 would be $240,000.
Usable Equity
A common misconception is that you can use all your equity to buy a property. In most instances, you can only borrow up to 80% of the value of your home.
With this in mind, here’s how you can calculate your usable equity:
- Calculate 80% of the value of your home (for example $500,000 x 80% = $400,000)
- Subtract your current outstanding debt ($400,000 – $320,000 = $80,000)
This means you would have $80,000 of usable equity to put towards a deposit for a home loan, as well as other buying costs like stamp duty and settlement fees.
If the usable equity isn’t enough to cover the full deposit and any stamp duty and settlement costs, you’ll also have to make a cash contribution.