Gross equity, net sale equity and borrowing capacity
These three concepts are related, but they serve different purposes and should not be used
interchangeably.
- Gross equity is the property value minus all secured balances.
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Net sale equity is what may remain after selling the property and deducting
secured debts, selling expenses, taxes and repayment charges.
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Potential borrowing capacity is the additional amount a lender might permit
while keeping total secured debt within its LTV and affordability rules.
A property can show substantial gross equity while offering far less borrowing capacity. Net sale
equity may also be lower once selling costs and loan repayment expenses are included.
Estimating equity at an LTV limit
A planning calculator can estimate the maximum debt allowed under a selected loan-to-value ceiling:
Maximum debt at selected LTV = property value × selected LTV
The difference between that maximum debt and the current secured balances provides a theoretical
borrowing amount:
Theoretical additional borrowing = maximum debt − current secured debt
This is not an approval figure. A lender may use a lower valuation, apply a stricter LTV limit,
deduct fees or approve less after assessing income, credit, expenses and loan purpose.
What causes home equity to change?
Regular principal repayments and voluntary overpayments generally reduce secured debt and build
equity. A rise in property value can also increase the estimate, although the gain remains uncertain
until a valuation or sale confirms a current value.
Equity can decline when property prices fall or additional borrowing is secured against the home.
Balances may also increase when unpaid interest, permitted charges or capitalised amounts are added
to the debt.
Because both property value and loan balance can change, long-term projections should include
falling-value scenarios as well as assumed appreciation.
Home equity is an ownership estimate, not a cash balance
Equity does not sit in an account ready to spend. It normally becomes accessible only by selling the
property or entering an approved financial arrangement secured against it.
Selling can involve brokerage charges, legal work, taxes, mortgage discharge costs and early
repayment fees. Borrowing against the property adds debt, interest, fees and repayment obligations.
Failure to meet the terms of secured borrowing can place the home at risk.