There are two key types of equity that can be used in this context: usable equity and non-usable equity.
Usable equity
Usable equity is the portion of your home’s value that you can safely use for investing without affecting your loan-to-value (LTV) ratio.
- To calculate your Loan-to-Value Ratio (LVR), simply divide the loan amount by the purchase price or valuation of the property you’re purchasing. This will give you a percentage representation of the LVR.
For example, let’s consider a scenario where you want to borrow $700,000 for a property valued at $900,000. The LVR calculation would look like this:
700,000 / 900,000 = 0.778 or 77.8% LVR
It’s important to note that the lower your LVR, the more usable equity you have available to invest in other properties or projects.
Non-usable equity
This refers to the portion of equity that either cannot be accessed due to lender restrictions or that you choose not to use to maintain a safe LTV ratio.
While usable equity can be directly leveraged for property purchases, non-usable equity simply contributes to the overall net worth of your assets, providing a financial cushion and increasing your creditworthiness.
Let’s explain usable and non-usable equity with an example.
Imagine you own a property worth $900,000, and you still owe $300,000 on your mortgage. So, the total value of your ownership in the house is $600,000 ($900,000 – $300,000).
But not all of this $600,000 can be used. Let’s say your lender allows you to borrow up to 80% of your home’s value. That’s $720,000 ($900,000 x 0.8), but since you already owe $300,000, you can only borrow an additional $420,000 ($720,000 – $300,000).
So, currently, you’re using only $120,000 of your usable equity ($600,000 – $480,000). The remaining $380,000 is non-usable equity contributing to the overall value of your assets.
