What the f**k is Equity?

While we all pick up a lot of useful financial knowledge and habits as we grow up, there are still a lot of basic terms and concepts around finances that get lost on most people. Words like "dividend reinvestment plans” and “equity”. What even is equity? Owners equity, available equity, equity loans… what does it do and what does it want with me?

Confusion around words and basic terms can often end up hitting you where it hurts (your wallet). A lot of the industry is set up with this confusing terminology, once you get your head around it and understand what it actually is, you don’t need to be scared of it or worried about it. A large part of my job is trying to explain financial concepts to people so they can understand what’s going to work for them.

So without any further ado, here’s the things you need to know about equity, with minimal confusing jargon.

What is equity?

I would normally explain it as the portion of the property you own. Say the value of a property in Sydney is worth 1 million dollars, your loan with bank is $700,000. Basically the bank owns the $700,000 worth of the property and you own the $300,000. And that’s your equity. In the simplest of terms, equity is the part of your property you don’t owe the bank money for.

What is available equity?

Let’s go back to our original 1M house example. Available equity is the portion of the property that you actually own. So the available equity in this example is $300,000. If you sold the property, basically you’d pay back the loan and ideally walk away with $300,000.

What is usable Equity?

Usable equity is the concept that your property is worth $X more than what you owe the bank.

Usable equity is a little different in the way that banks will give homeowners access to their equity to use for other purposes, but they have some restrictions on how much you’re able to access. In order to access “equity” you must first turn it into something real. You can either sell your property or create a loan. This is where loan rules come into play.

Banks will allow someone to loan up to 90% of the value of their property. Using the $1M example, potentially the useable equity is $200,000 because banks will allow the homeowner to borrow up to $900,000. They owe $700,000 already, but banks will allow the owners to go back to them and borrow some additional money from them which is the person’s equity.

For a lot of people, this is a way to build an investment property portfolio. Rather than saving up for a deposit for a second property, people can access their equity which the bank pays out as cash which they can use as a deposit on their next investment property. When you hear people saying they are “accessing equity” what they really mean is “getting a new bank loan”. Simple.

Essentially the bank is using the “increased value” or “equity” to act as security on the loan. They want to know that if people default and they have to sell the house they will get their money back.

How to grow your Equity?

If you work for a salary, your income is mostly fixed. There are only so many hours of work you can do and those hours are paid at a fixed rate. If you want to grow your equity there are a few things to take into consideration.

You have a few investment options: 

• Stocks – Invest your own money to buy stocks 
• Property – Loan money from the bank to buy property 

Investing in property that you can rent to other people is a way to potentially grow your equity that doesn’t rely on saving money. 

Number one is to have something to work towards or aim for like a goal or a target. Whenever I’ve had clients who have something that they’re aiming for, whether that’s a holiday or a car - they’ll find a way to make it happen.

The other thing worth doing is that budget your high school teacher banged on about. Ryan says budgeting is a bit like trying to get healthier. Everyone knows they’ve got to eat healthily, do exercise and get lots of sleep. But when you’re busy with your family and career and everything else, it’s not actually that easy to do the simple thing. Finance is exactly the same.

You need to reflect on your spending habits to know, realistically, what your living expenses are. Especially if you’ve set that goal such as saving for that holiday or planning your retirement. How can you work out how much you have to retire on if you don’t know how much your everyday living expenses cost? Retirement might not be as comfortable as you imagine if you don’t know your cash flow habits and challenges.

Know your numbers. You’ve got to know what comes in, what goes out and what’s left over. The word ‘equity’ is simple enough but not so simple when put into practice.

Want to see how much Equity you're sitting on?

We have access to free upfront valuations from any of our lenders. Please don't hesitate to contact me if you want more information.

Available 7 days - [email protected] 0404 242 033

Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.