Smart ways to calculate and access home equity

How to calculate usable equity in your property

Your usable equity is calculated by multiplying your property's current value by 80%, then subtracting your outstanding loan balance. That figure represents what most lenders will allow you to access without requiring lenders mortgage insurance.

Consider a judicial officer who purchased a property several years ago for $850,000 with a 20% deposit. The loan balance has reduced to $580,000, and the property is now valued at $1,100,000. The calculation works as follows: $1,100,000 x 80% = $880,000. Subtract the outstanding loan of $580,000, and the usable equity is $300,000. That amount could be accessed through refinancing without triggering LMI, assuming income and serviceability support the increased borrowing.

The 80% threshold is the standard lending position. Some lenders will extend to 90% or 95% of the property value, but this introduces LMI and higher interest costs. For judicial officers with access to LMI waivers, the calculation shifts. Using the same example above, if the lender permits borrowing up to 90% without LMI, the usable equity becomes $410,000 instead of $300,000. That additional $110,000 can be material when funding an investment purchase or undertaking a significant renovation.

Why lenders use 80% and not the full property value

Lenders cap accessible equity at 80% to maintain a buffer against market volatility and loan default risk. Property values fluctuate, and a loan secured against 100% of a property's value leaves no margin for correction if the market softens or if the borrower defaults and the property must be sold under distressed conditions.

The 20% equity buffer also reflects the typical cost of selling a property, including agent commissions, legal fees, and marketing expenses. If a lender needs to recover funds through a mortgagee sale, that 20% margin covers most of the associated costs and any short-term market movement. Borrowers who exceed 80% are required to pay LMI, which protects the lender in the event of a shortfall but does not benefit the borrower directly.

For professionals with occupation-based LMI waivers, the lender's risk appetite changes. The waiver reflects an assessment that the borrower's income stability and career trajectory reduce the likelihood of default, which permits higher leverage without the insurance cost.

Ordering a valuation when you refinance

Most lenders will order a valuation as part of the refinance process, but the method varies. Some use an automated valuation model, which draws on recent sales data and property characteristics to estimate value. Others instruct a physical inspection by a certified valuer. The type of valuation used depends on the loan amount, the property type, and the lender's internal policy.

If you need a higher valuation to access sufficient equity, you can request a full valuation rather than an automated assessment. This is particularly relevant if your property has undergone significant improvements or if recent comparable sales in your area support a higher figure than the automated model suggests. In our experience, valuations for properties in areas with limited recent sales data or unique characteristics tend to benefit from a physical inspection, as the valuer can account for factors that an algorithm cannot capture.

You can also commission an independent valuation before applying to refinance. This costs between $400 and $800 depending on the property type and location, but it provides certainty about your equity position and helps you determine whether refinancing is viable. If the independent valuation falls short of what you need, you can delay the refinance application and reassess in six to twelve months.

Using equity to fund an investment property purchase

Accessing equity to fund an investment deposit is one of the more common reasons judicial officers refinance. The equity becomes the deposit for the second property, and the rental income from that property supports the additional borrowing.

In a scenario like this, a judicial officer with $350,000 in usable equity refinances to access $280,000 for an investment deposit and associated costs. The remaining property is purchased with an 80% loan-to-value ratio, and the rental income covers a portion of the interest on both loans. The original loan increases from $580,000 to $860,000, and the interest cost rises accordingly. The refinance application must demonstrate that both loans are serviceable based on current income, existing commitments, and the rental income from the investment property. Lenders typically apply a haircut to rental income, assessing only 70% to 80% of the projected rent to account for vacancy periods and maintenance costs.

If you are considering this approach, review the interest cost on the increased borrowing against the expected return from the investment property. The numbers need to support the strategy, particularly if you are moving from a low fixed rate to a higher variable rate. We regularly see this miscalculation, where the equity is accessible but the cashflow does not support the increased repayments comfortably. The relevant page on expanding your property portfolio covers the broader framework for structuring multiple properties.

What happens if your equity is insufficient

If the calculation shows that your usable equity is lower than required, you have several options. You can wait for the property value to increase or for the loan balance to reduce further through regular repayments. Alternatively, you can accept a higher loan-to-value ratio and pay LMI, which increases the upfront cost but provides immediate access to the funds.

Another option is to use a guarantor, where a family member offers their property as additional security. This can increase your borrowing capacity without requiring you to pay LMI, but it introduces complexity and risk for the guarantor. The guarantor remains liable until the guarantee is discharged, which typically occurs once your equity position improves or your loan balance reduces to a level that satisfies the lender. More detail on this structure is available on the guarantor loans page.

Some judicial officers also consider using a line of credit secured against their existing property rather than refinancing the entire loan. This keeps the original loan in place and provides flexible access to equity as needed. The line of credit usually carries a higher interest rate than a standard variable loan, so the cost difference should be factored into the decision.

Serviceability and equity are separate considerations

Having sufficient equity does not guarantee approval to refinance. Lenders assess your capacity to service the increased loan amount based on your income, existing debts, living expenses, and the lender's assessment rate. The assessment rate is typically 3% above the actual loan rate, which means you need to demonstrate that you could still afford the repayments if rates increased.

For judicial officers with stable income, serviceability is usually manageable, but other commitments can constrain borrowing capacity. Investment property loans, car loans, and credit card limits all reduce the amount a lender will approve, even if the equity calculation supports a larger drawdown. If serviceability is marginal, paying down other debts or reducing credit card limits before applying can improve the outcome.

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