Usable equity, worked out step by step before a lender does it for you

Most owners who ask “how much equity do I have?” are working out the wrong number. The figure that matters to a lender isn’t what you’d have left if you sold the property. It’s how much more it will let you borrow before its safety margin is gone. That figure is usable equity, and working it out takes five minutes and a pen.

What’s the difference between equity and usable equity?

Equity is the plain gap between what the property is worth and what’s owed against it. A property valued at $900k with $400k owing has $500k of equity.

Usable equity is what’s left once you apply the lender’s ceiling. If the lender will lend up to 70% of value, it will allow total debt of $630k on that property. You already owe $400k, so the usable portion is $230k. The other $270k stays in the property as the lender’s cushion.

Our short glossary entry on equity covers the term; this guide is about turning it into a dollar figure you can plan around.

The formula, in five steps

1. Pick a realistic value. Not the highest agent estimate. A conservative figure, perhaps 5% under what you hope for, because the lender’s valuer decides the number that counts.
2. Choose a ceiling. Ask the lender or specialist for the maximum combined LVR on your property type. If you don’t know yet, use a prudent range, say 60% to 70% for a second-ranking loan on a standard residential property, and test both ends.
3. Multiply. Value × ceiling = maximum total debt.
4. Subtract what’s already secured. Use the payout figure for every loan on the title, not the original amount.
5. Subtract the costs. Fees, valuation, legal costs, capitalised interest and any prepaid interest reduce the cash you actually receive.

What’s left is the cash you can reasonably plan on.

A worked example, with the costs included

An owner of a mechanical workshop holds a home valued at $1.1m and wants funds to buy a second hoist and fund stock. These are invented numbers for illustration.

Step	Calculation	Result
Conservative value	$1.1m less 5%	$1,045,000
Assumed combined ceiling	65%
Maximum total debt	$1,045,000 × 65%	$679,250
Owing on home loan (payout figure)		$480,000
Headline usable equity	$679,250 − $480,000	$199,250
Fees, valuation, legal	assumed	$9,000
Interest added to the loan for 6 months	assumed, using the quoted dollar figure	$11,000
Cash realistically available		about $179k

She was thinking in terms of “I have over half a million dollars of equity”. The number she can plan with is closer to $179k. That is still useful, but it changes whether the refit and the stock purchase both fit. The property equity calculator lets you run the same sum with your own figures.

What shrinks usable equity without you noticing?

• Redraw and undrawn limits. If your home loan has a large redraw facility or you have a line of credit secured on the same title, some lenders count the limit as debt, not the balance.
• Other registered interests. A second mortgage, a caveat, a charge for unpaid land tax or a council rate debt can all sit ahead of a new lender. A title search shows what is recorded; our guide to how Torrens title affects business loans explains why it matters.
• Cross-securing. If your existing lender holds the same property against several loans, the full balance of all of them counts.
• Property type. Ceilings are typically lower for rural, mixed-use, strata commercial or unusual properties. See our guide on how lenders value commercial property.
• A conservative valuation. A desktop valuation based on limited sales evidence can come in lower than expected. Read how valuations work before you assume the figure.

Whose equity is it?

The maths assumes you own the equity. The paperwork may say otherwise.

• Joint owners. Every owner on title must sign the mortgage. If one doesn’t want to, the equity isn’t available, even though the number looks big.
• Trust or company titles. The trustee or company is the legal owner. The trust deed must permit borrowing and giving security, and a lender will read it. See how trusts affect business borrowing.
• Self-managed super funds. Property held in an SMSF follows different rules again; our guide to SMSF and business property outlines them.
• Properties with a tenant or a lease. Commercial lease terms can alter the value.

Pause here if you’ve spotted something that applies to you. Tell us about the title and we’ll tell you honestly whether it’s a hurdle.

How much of your usable equity should you actually use?

The number you’ve calculated is a ceiling. It isn’t a target. Three reasons to stay below it:

1. Valuation risk. If the valuer comes in lower, the room can vanish. A margin keeps the deal intact.
2. Cost drift. Fees and capitalised interest tend to rise if the term extends.
3. Your own safety. The less of the property you commit, the less exposed your family is if the plan slips. Our guide on the risks of using your home as business security puts the downside in plain numbers.

A decent rule of thumb is to ask for the amount the business needs plus fees, and not to take the remainder just because it’s there.

How does usable equity connect to the loan type?

The same equity can be accessed in different ways:

• A first mortgage business loan replaces what you owe and can release the difference, subject to the new lender’s ceiling.
• A second mortgage sits behind your current loan. The usable room is what remains under the combined ceiling.
• A caveat loan uses the same room for a shorter term and quicker timeline.

Which one fits depends on how long you need the money, how fast, and what your current lender allows.

Turn the number into a plan

You now have a defensible figure for your own usable equity. The useful next question is whether that room fits what the business needs and for how long, and that’s the conversation our enquiry starts. It takes about a minute, and asking won’t be recorded as a credit check, so your score stays exactly where it is.

Your details aren’t sent to a heap of lenders. One of our people reads the enquiry and phones you to talk it through. If you enter the property value, what’s owed and who is on the title as accurately as you can, the right structure should surface first time.

Check my numbers with a real person →