Equity and borrowing capacity are not the same thing.
Here's why that matters.
Many borrowers have significant equity but can't access it because they don't have the income to service a larger loan. Understanding the difference is critical to your next move.
What is equity?
Equity is the difference between what your property is worth and what you owe.
Equity = Property Value − Loan Amount
Example: Property worth $500,000, loan $350,000 = $150,000 equity (30%).
As property values rise or you pay down the loan, equity grows. As property values fall or you borrow more, equity shrinks.
Equity is a store of value. Having equity doesn't automatically mean you can access it through borrowing.
What is borrowing capacity?
Borrowing capacity is how much lenders will allow you to borrow based on your income and expenses.
Borrowing Capacity = (Income − Expenses) ÷ Serviceability Ratio
This is serviceability-based. If you earn $80,000, expenses are $30,000, and the serviceability ratio is 0.4, your borrowing capacity is roughly $200,000.
Borrowing capacity is independent of how much equity you have. You might have $200,000 in equity but only $50,000 borrowing capacity.
Common scenarios where equity and capacity diverge.
Understanding why you have equity but can't borrow is the first step to creating a path forward.
High living expenses
Retirees often have significant equity but limited income. Lenders see high expenses relative to income and won't lend.
Variable or complex income
Self-employed borrowers, contractors or commission-based income may have high total income but limited borrowing capacity because lenders discount income or require longer history.
Existing debts
Credit cards, car loans and personal loans reduce your capacity. You might have equity but debt serviceability eats up borrowing power.
Age or employment risk
Approaching retirement or changing jobs can reduce borrowing capacity even if your equity position is strong.
If you have equity but limited capacity.
Several strategies can improve access to your equity.
- Reduce living expenses: Or document lower expenses — improves serviceability calculation.
- Consolidate debts: Roll credit cards and personal loans into the mortgage — frees up serviceability.
- Add income: Rental income from a granny flat or second property can improve capacity.
- Co-borrower: Add a spouse or family member with income to bolster serviceability.
- Specialist lenders: Some lenders are more flexible on complex income, age or retirement scenarios.
- Partial draw: Draw only what your serviceability allows rather than max equity.
Make your equity work for you.
Bharat Finance helps clients assess the relationship between available equity, borrowing capacity and the requirements of different lenders.