You may have heard the term “Usable Equity” before and wondered what it means. Let’s dive in…
In simple terms, it is the amount much equity you have available to be “used” – easy right?
But how do I calculate this? And what can I use it for?
To calculate usable equity, we need to know 3 things:
- Market value of your existing property
- Max Loan to Value Ratio (LVR) for that property
- Current debt secured against that property
Usable Equity then equals:
Market Value of property x max LVR (%) minus current debt
E.g. $1m x 80% minus $450k = $350k Usable Equity
The max LVR is important because it has a significant impact on how much usable equity is available. For owner occupied properties, max LVR is usually 80%. Whereas for investment properties the max LVR is 65% at the time of writing this article.
To access this usable equity, you are effectively requesting a top up against the existing security property, and using this new money as “deposit” or “equity” towards another investment such as an investment property.
Using the figures above, the $350k usable equity becomes the 35% minimum deposit required and you can borrow the remaining 65% ($650k) against the investment property. You have successfully borrowed 100% of the purchase price ($1m) across two different properties.
Note you also have to meet the banks affordability criteria to access these new loans.
You may also want to access your usable equity for something much smaller like purchasing a new car, investment in shares, or paying off another unsecured loan.
If you have good equity in your property, you might be able to put it to better use, which could work out more beneficial to you in the long term. So, check out how much usable equity you have!