Equity. What is it and how to calculate it?

Equity is a cool. The more equity to have the richer you are! It’s not some mythical thing, but it can grow magically without you knowing. It can also magically reduce without you knowing as well!

So what is it? Well the accountants tell it as being Assets minus Liabilities equals Equity! In business, it's the value of the parts of the business minus the loans against them, which equals the equity.

But in terms of your home, it’s the amount of the property that you actually own - which is the property value minus your current loan. That's your equity!

So while you're working hard everyday and doing things in life, your equity can grow, because the value of your home can be increasing in the market. It can also grow by paying off you loan. And if both of those things happen at the same time, your equity can grow faster!

But when it comes to banking and your home loan, the lenders like to put a bit of a buffer in between the value of your home and what they’ll lend to you, because property prices (and therefore values) can fluctuate. Which is a good thing, because it is not just a buffer for them, but it’s a buffer for you too. The last thing you want is to buy a home, which is lower in value 1 year later and you have a loan which is higher than the home. That’s called negative equity and that ain’t good.

So how do you calculate your equity? Well, it’s like this: If your home is worth $800,000 and your loan is $360,000 then you have $440,000 equity or 55%. However for a bank, we take 80% of the $800,000, which is $640,000, then minus your loan of $360,000, meaning you have $280,000 in available equity or 43.75%. So there's that buffer.

Good things can happen with equity. Sometimes you can use this equity to consolidate some personal debts; sometimes you can use it to for investing; but it is most commonly used to buy a bigger home or buy an investment property.

Of course, you need to be able to afford a bigger home (and a bigger loan) or an investment property.So try using our affordability calculator or contact a HoLo person.