Mr's short answer
Enough that, after everything already owed on the property, the new loan still sits inside the lender's maximum loan-to-value ratio with room to spare. First-mortgage lenders allow a higher LVR than second-mortgage and caveat lenders, who keep a larger buffer. Location, property type and the exit plan all move the limit, so usable equity is always less than equity on paper.
Key points
- Equity = property value minus everything owed against it.
- LVR = total lending against the property ÷ its value.
- Second-mortgage and caveat lenders keep a bigger buffer than first lenders.
- Property type, location and condition all affect the usable amount.
“I’ve got heaps of equity” is one of Mr’s favourite opening lines, usually followed by a slightly deflated face once the lender’s numbers come back. Not because the owner was wrong about the house — but because equity on paper and equity a lender will lend against are two different things. Here’s how to close that gap before you apply.
What’s the difference between equity and usable equity?
Equity is simple: what the property is worth, minus everything owed against it.
Usable equity is what a lender will actually lend against, after it applies:
- its maximum loan-to-value ratio (LVR) for that property and loan type;
- a valuation that may be more conservative than your own estimate;
- adjustments for property type, location and condition;
- room for costs, such as fees deducted at settlement.
How do lenders work it out?
The core formula:
Usable equity ≈ (property value × lender’s maximum LVR) − existing lending on the property
An illustrative example, with made-up figures for a house in Tauranga:
| Step | Illustrative figure |
|---|---|
| Valuation | $1,000,000 |
| Existing home loan | $550,000 |
| Equity on paper | $450,000 |
| If a lender’s maximum total LVR were, say, 70% | $700,000 total lending allowed |
| Less existing home loan | $550,000 |
| Room for a new loan | Up to about $150,000, before costs |
That’s the deflated face moment: $450,000 of equity, but about a third of it usable in this example. A different lender, property or loan type would give a different answer — but the shape of the sum is always the same.
Why do second-mortgage lenders allow less?
Because they’re second in line. If the property is ever sold to repay debts, the first lender is paid first. The second lender only gets what’s left, so it keeps a bigger cushion. Caveat-style lenders, who rely on a caveat rather than a registered mortgage, tend to be at least as careful. More on that in what’s a second mortgage?
What else moves the limit?
| Factor | Usually helps | Usually reduces |
|---|---|---|
| Location | Main centres and larger towns | Remote or small markets |
| Property type | Standard houses, well-located commercial | Lifestyle blocks, special-purpose buildings, bare land |
| Condition | Well maintained | Needs significant work |
| Title | Freehold, straightforward | Unusual title types, cross-leases with issues |
| Exit plan | Clear and near | Vague or distant |
If your property sits on the “reduces” side, it doesn’t mean no — just a more conservative number. Commercial and investment properties have their own considerations, covered on can I use commercial or rental property as security?
Want a realistic read on what your property could support? Tell us about it here — no credit check involved.
How can I make the most of my equity?
- Get a sensible value estimate before you apply, using recent nearby sales rather than hopeful listings.
- Know your exact loan balance, including any revolving credit or top-ups.
- Tidy the property if a valuer is coming — first impressions count.
- Consider a second property if one alone doesn’t reach the amount.
- Borrow what you need, not the maximum; it keeps a buffer for later.
Is more equity always better?
More equity gives a lender comfort and may help with pricing and options. But Mr’s caution applies: equity makes borrowing possible; your business’s ability to repay, or a solid exit, makes it sensible. Read how much can my business borrow? for the other half of the picture.
A second illustrative example: two properties together
Again, made-up figures to show the method.
A café owner in Whanganui needs more than her home’s equity can support on its own. She also owns a small rental unit with a modest mortgage.
- Home: good value, sizeable mortgage — limited room for a new loan after the lender’s LVR.
- Rental: smaller value, small mortgage — proportionally more room.
Some lenders will take security over both properties, so the combined usable equity reaches the amount she needs. The rental’s tenancy and condition get checked, and if her partner co-owns the home, he’ll need to agree and get independent legal advice. Using both properties can also mean a slightly lower overall LVR, which gives the lender comfort.
The trade-off: two properties now stand behind the business loan instead of one. She weighs that against the alternative — a smaller loan that wouldn’t fully fund the plan.
Mr’s equity quick-check
Do this on the back of an envelope before you call anyone:
- Estimate the value using two or three recent nearby sales, not listing prices.
- Shave a little off — valuations tend to be careful.
- Multiply by a conservative LVR for the type of loan you’re considering. First lenders allow more than second lenders.
- Subtract everything owed on the property, including revolving credit limits.
- Subtract a little more for fees and costs.
If the result is comfortably above what you need, you’re in good shape. If it’s close or below, consider a second property, a smaller amount, or combining a property-secured loan with an unsecured facility sized on turnover.
Find out what your equity can do
Tell us the property’s approximate value, what’s owing and what the business needs. There’s no credit check to ask, your details aren’t sent to a pile of lenders, and a real specialist will tell you what’s realistic for your property and purpose.
Please be accurate with the existing loan balance on the form — it’s the number most likely to change the answer. See what your equity could support.
Frequently asked questions
What is LVR?
Loan-to-value ratio: total lending secured on the property divided by the property's value. If a property is worth $1,000,000 and $600,000 is owed against it, the LVR is 60%.
Does the lender use my estimate of the value?
Your estimate is a starting point. For most property-secured loans the lender relies on a registered valuation or its own assessment, which may differ from what you'd expect from a recent sale down the road.
Do rural or lifestyle properties count?
They can, but lenders are often more conservative with lifestyle blocks, rural land and unusual properties because they can take longer to sell. Expect a lower maximum LVR.
Can I combine equity from two properties?
Sometimes. Some lenders will take security over more than one property to reach the amount needed, subject to each owner agreeing and the properties meeting criteria.