What is Equity?

Equity is a term that comes up often in discussions about property investment, but a surprisingly large number of people don't understand it.

Put simply, equity is the difference between what you owe on a property, and the market valuation of the property as established by a qualified valuer. For example if your house is valued at $500,000 and you owe $50,000 on it, you have $450,000 of equity.

Here's where people come undone. They think that because they have so much equity, they can just walk into the bank and clear the remainder of their loan because they have more equity than they owe. Or they think they can go into the bank and "withdraw" their equity leaving their loan exactly the same size.

You can't. Equity is not real money. There are only two ways you can turn your equity from a number on paper to cold, hard cash:

  1. Borrow against your equity
    The bank will allow you to use your equity as security for a loan. Usually referred to as a "top up" loan, you can use your equity to secure a new loan for renovations, buying an investment property, or even taking a holiday. The same lending criteria applies to an equity secured loan as to any other loan - you will need to be able to afford to pay it back. If your income is very low, even if you have a million dollars in equity the bank simply won't give you any of it.
  2. Sell your house
    The other way to release equity is to sell your house. In doing so, you pay out any loans you have with the bank that are secured against your house, and all the equity becomes cash. When done this way you typically won't get the full amount of the equity as some will be used to pay real estate agent selling fees and any outstanding debts on the property, such as outstanding council rates. If you are on a very low income with very large amounts of equity, selling your house is often the best choice.

Additionally, equity and redraw are not the same thing but people sometimes get confused between these two concepts. Redraw is accumulated if you pay more than the minimum repayments that the bank requires. This is the only way to get redraw. Equity tends to accumulate as the value of your house increases either simply by the passage of time or because you improved its value by renovating or some other means.

Redraw can generally be drawn on simply by going into your bank, filling out a form and often paying a small fee, with no questions asked provided the redraw is there. After all, it is your money that you have put into your mortgage. Equity requires a full new loan application to access.