The rough sum
Most lenders will lend up to 80% of the value of a property without charging lenders mortgage insurance. A rough estimate of usable equity is therefore 80% of the value of your property, less what you currently owe on it.
As an illustration: a home valued at $900,000 with a loan of $450,000. Eighty per cent of the value is $720,000. Take away the $450,000 loan and the usable equity is about $270,000.
The value that counts is the lender's valuation, which can be lower than the price you would expect to sell for.
What it needs to cover
- The deposit on the land and the build. This is commonly 10% to 20% of the total, depending on the lender and on whether lenders mortgage insurance applies.
- Duty on the land. See stamp duty on house and land.
- Legal fees and lender fees.
- A buffer for interest during construction.
On a package of $650,000, for example, a 20% deposit is $130,000, with duty and costs on top.
How it is usually set up
Commonly the lender increases the loan on your existing property, or adds a separate loan secured against it, and that money becomes the deposit. The rest is borrowed against the new property. How the two loans are structured matters, including whether the two properties end up as security for each other. A licensed broker can explain the options.
What equity does not do
- It does not increase your borrowing capacity. You still have to show that you can service all of the debt, old and new.
- It is not free. Released equity is a loan, and it carries interest.
- It is not guaranteed. It depends on the valuation on the day.
Three things to find out
- An estimate of the current value of your property, from a broker.
- Your borrowing capacity with the equity loan included. See what reduces your borrowing capacity.
- How the interest on the equity loan is treated for tax in your case, from a registered tax agent.
We do not hold an Australian Credit Licence, so we do not assess or arrange lending. We bring a licensed broker in at the start, because the number they confirm is the ceiling for everything that follows.