If you already own property in New Zealand, you're sitting on a potential deposit for your next purchase. Using equity—the difference between your property's value and what you owe—is one of the most powerful strategies for upgrading homes, purchasing investment properties, or helping family members into the market.
Understanding Equity
What Is Equity? Equity is the portion of your property you truly "own"—the difference between market value and outstanding mortgage.
Calculation:
- Property value: $750,000
- Mortgage owing: $450,000
- Your equity: $300,000
How Equity Grows:
- Principal payments: Every mortgage payment increases equity
- Capital appreciation: Property value increases over time
- Additional payments: Extra payments accelerate equity growth
- Renovations: Improvements can add value (and equity)
Example of Growth:
- Year 1: $750,000 value - $450,000 owing = $300,000 equity (40%)
- Year 5: $850,000 value - $410,000 owing = $440,000 equity (52%)
Usable Equity vs Total Equity
Total Equity: The complete difference between value and debt.
Usable Equity: The amount you can actually access, limited by bank LVR restrictions.
Calculation:
For Owner-Occupied Property:
Most banks lend up to 80% LVR:
- Property value: $850,000
- 80% LVR = $680,000
- Current mortgage: $500,000
- Usable equity: $180,000
For Investment Property:
Banks typically limit to 70% LVR for equity release:
- Property value: $650,000
- 70% LVR = $455,000
- Current mortgage: $350,000
- Usable equity: $105,000
Equity Access Comparison by Property Type
Understanding how much equity you can access depends on your property type and intended use.
| Property Type | Maximum LVR | Equity Access Threshold | Usable Equity Calculation | Best For |
|---|---|---|---|---|
| Owner-Occupied Home | 80% | Need 20% equity minimum | (Value × 80%) - Mortgage | Upgrading, investment deposits |
| Investment Property | 70% | Need 30% equity minimum | (Value × 70%) - Mortgage | Additional investments |
| Guarantor Arrangement | 85-90% | Variable | Depends on agreement | Helping family |
| Development/Renovation | 65-70% | Need 30-35% equity | (Value × 65-70%) - Mortgage | Property development |
When You Can Use Equity as a Deposit
Scenario 1: Upgrading Your Home
- Sell current property and buy new one simultaneously
- Use equity as deposit for new purchase
- "Bridge" between settlement dates if timing misaligned
Scenario 2: Buying Investment Property
- Keep your current home
- Release equity to fund investment property deposit
- Both properties become security for lending
Scenario 3: Helping Family Members
- Provide guarantor support for children/family
- Your equity acts as additional security
- Various structures available (guarantor loan, equity share)
Scenario 4: Buying Before Selling
- Purchase new property using equity
- Sell current property afterwards
- Requires strong serviceability for temporary dual mortgages
Scenario 5: Debt Consolidation
- Release equity to pay off high-interest debt
- Reduces overall interest costs
- Frees up serviceability for other purposes
How to Release Equity from Your Property
Successfully releasing equity requires careful planning and following a structured process.
Step 1: Get Current Property Valuation (Week 1) Contact your bank for a free desktop valuation, which uses recent comparable sales in your area. Alternatively, pay for an independent registered valuation ($500-$800) for a more accurate assessment. You can also use recent sales data from property websites for a rough estimate. Understanding your true property value is critical for calculating available equity.
Step 2: Calculate Usable Equity (Week 1) Determine the maximum LVR for your situation (70-80% depending on property type). Multiply your property value by this percentage to find maximum lending. Subtract your current mortgage from this figure to determine usable equity. Remember to account for costs (legal fees, valuation fees) which reduce the net amount available.
Step 3: Check Serviceability (Week 1-2) Calculate your total debt after equity release across all properties. Ensure your income can comfortably service all debt obligations. Banks will stress-test at rates 2-3% above current rates to ensure you can handle increases. If purchasing an investment property, remember banks only count 70-75% of projected rental income.
Step 4: Choose Your Lending Structure (Week 2) Decide between three main options. Option A is increasing your existing mortgage—simple and usually lowest rates but cross-collateralizes properties with less flexibility. Option B is a separate top-up loan—a second mortgage on your property that keeps financing separate and makes tracking easier but may have slightly higher rates. Option C is separate securities—each property secures only its own loan, providing maximum flexibility, though it may require higher deposits.
Step 5: Apply for Finance (Week 2-4) Approach your current bank first as they already know your history and may streamline approval. Consider shopping around for better rates from other lenders. Provide comprehensive documentation: proof of income, current mortgage statements, property valuation, details of intended purchase, and rental assessment if buying investment property. Present a complete application to speed up processing.
Step 6: Approval and Drawdown (Week 4-6) Receive conditional approval with any final conditions outlined. Complete final checks including updated valuations if needed. Once unconditional approval is granted, equity is released at settlement. Funds become available for your new property deposit through your solicitor's trust account.
Timeline: Total process typically 4-6 weeks from start to accessing funds.
Real-World Equity Release Examples
Example 1: First-Time Upgrader
Situation:
- Current home: $700,000 value, $380,000 mortgage
- Target property: $900,000
- Need 20% deposit: $180,000
Equity Calculation:
- Total equity: $320,000
- Usable (80% LVR): $560,000 - $380,000 = $180,000
- Perfect match for deposit requirement
Process:
- Sell current property
- Use $180,000 equity as deposit
- Remaining equity covers costs and reduces new mortgage
- New mortgage: ~$720,000 (80% of $900,000)
Example 2: Investment Property Purchase
Situation:
- Own home: $850,000 value, $450,000 mortgage
- Investment target: $600,000
- Need 35% deposit: $210,000
Equity Calculation:
- Total equity: $400,000
- Usable (80% LVR): $680,000 - $450,000 = $230,000
- Sufficient for deposit plus costs
Process:
- Don't sell family home
- Release $230,000 equity via increased mortgage
- Family home mortgage rises to $680,000
- Use $210,000 for investment deposit
- Remaining $20,000 covers costs
- Investment property loan: $390,000 (65% of $600,000)
Example 3: Helping Children Buy
Situation:
- Parents' home: $1,200,000 value, $300,000 mortgage
- Child buying first home: $650,000
- Child has 5% deposit ($32,500), needs 10% minimum
Equity Calculation:
- Parents' total equity: $900,000
- Parents' usable equity: $960,000 - $300,000 = $660,000
- Guarantor amount needed: $32,500 (5% of purchase)
Process:
- Parents provide guarantor guarantee
- Their equity secures child's full loan
- Child borrows 95% ($617,500)
- Parents' property at risk if child defaults
- Plan for child to refinance and release guarantee within 2-5 years
Risks and Downsides of Using Equity
Risk 1: Property Value Decline
If property values fall, your equity shrinks:
- $850,000 value drops to $780,000
- Your $400,000 equity drops to $330,000
- May fall below bank LVR requirements
- Could trigger margin calls
Risk 2: Over-Leveraging
Using all available equity leaves no buffer:
- Can't access funds in emergency
- Vulnerable to value decreases
- Limited flexibility for future opportunities
- Higher stress if income reduces
Risk 3: Increased Debt Burden
More total debt means:
- Higher monthly payments
- Greater interest costs over time
- More vulnerability to rate increases
- Longer time to financial freedom
Risk 4: Cross-Collateralization Issues
If properties cross-collateralized:
- Can't sell one without bank approval
- Harder to refinance individually
- Both properties at risk if one defaults
- Limits future flexibility
Risk 5: Serviceability Constraints
Taking maximum equity can:
- Exhaust borrowing capacity
- Prevent future lending
- Limit ability to weather financial challenges
- Restrict options if circumstances change
Equity Release Risk Assessment
| Risk Factor | Low Risk | Medium Risk | High Risk | Mitigation Strategy |
|---|---|---|---|---|
| LVR After Release | <75% | 75-80% | >80% | Leave 10-15% equity buffer |
| Income Stability | Permanent job, 5+ years | Contract, 2-5 years | Casual, <2 years | Build larger cash reserves |
| Property Market | Strong growth area | Stable market | Declining market | Delay release or reduce amount |
| Debt Coverage | Income covers 150%+ of debt | 120-150% coverage | <120% coverage | Reduce debt or increase income |
| Interest Rate Buffer | Can handle +3% rates | Can handle +2% rates | Struggle at +1% | Fix rates, reduce borrowing |
Best Practices for Using Equity
1. Keep a Buffer
Don't use maximum usable equity:
- Leave 10-15% equity buffer
- Maintains flexibility
- Protects against value fluctuations
- Preserves access to emergency funds
2. Stress-Test Your Position
Model scenarios:
- Interest rates 3% higher
- Property values 10% lower
- 6-12 months without rental income
- Job loss or income reduction
Can you still manage? If not, reconsider.
3. Separate Securities When Possible
Unless rates significantly better with cross-collateralization:
- Keep each property securing only its own loan
- Preserves flexibility
- Easier to sell/refinance
- Cleaner structure
4. Document Everything
Especially for family arrangements:
- Written agreements
- Clear repayment terms
- Exit strategies
- Legal advice for all parties
5. Plan Your Exit Strategy
Before using equity, understand:
- How will you rebuild equity?
- When can you refinance to better structure?
- What happens if values don't rise as expected?
- What's your plan B?
Tax Implications
Using Equity for Investment:
- Interest on equity release may be deductible (changing rules - check current legislation)
- Keep clear records of how funds used
- Separate investment from personal debt
- Professional tax advice essential
Capital Gains Considerations:
- Primary residence typically exempt from tax
- Investment properties subject to Brightline test
- Using equity doesn't trigger tax itself
- Selling properties may have tax implications
Alternatives to Using Equity
If equity strategy doesn't suit your situation:
Option 1: Save Cash Deposit
- Takes longer but reduces debt
- No increased risk to existing property
- Maintains maximum flexibility
Option 2: Gift or Inheritance
- Family financial assistance
- Doesn't increase your debt
- Clear ownership
Option 3: KiwiSaver (First Home)
- If eligible as first-home buyer
- Doesn't impact existing property
- Government support available
Option 4: Downsize First
- Sell large home, buy smaller
- Release equity as cash
- Then purchase investment or help family
Red Flags: When NOT to Use Equity
Don't use equity if:
- You'd exceed 85% LVR on any property
- Can't comfortably service increased debt
- Your income is unstable or at risk
- Property market showing significant weakness
- You haven't stress-tested the strategy
- Using it to fund lifestyle or depreciating assets
- Don't understand the risks
- Doing it only because "property always goes up"
Common Questions and Misconceptions
Misconception 1: "Equity is free money" Reality: It's borrowed money secured against your property. You pay interest and increase debt.
Misconception 2: "Banks will always lend up to 80%" Reality: Banks assess serviceability and risk. Meeting LVR doesn't guarantee approval.
Misconception 3: "I can access equity anytime" Reality: Requires formal application, valuation, and approval. Takes 4-6 weeks minimum.
Misconception 4: "Using equity doesn't affect my mortgage" Reality: It increases your total debt and monthly payments.
Frequently Asked Questions
Q: How much equity do I need before I can use it? A: Generally, you need at least 20% equity in your property (meaning 80% LVR) before banks will consider lending against it for other purposes.
Q: Can I use equity from an investment property? A: Yes, but banks typically restrict you to 70% LVR on investment properties, meaning you need 30% equity before accessing any.
Q: How long does it take to access my equity? A: The process typically takes 4-6 weeks from initial application to receiving funds, including valuation, approval, and documentation.
Q: Do I have to pay back the equity I use? A: Yes—equity release increases your mortgage debt. You repay it through mortgage payments over the loan term, just like your original mortgage.
Q: Can I use equity instead of cash for an investment property deposit? A: Yes, this is very common. Banks treat equity and cash deposits similarly, though the total LVR across all properties must meet their requirements.
Q: What happens if property values drop after I've used my equity? A: Your equity decreases, potentially putting you over the bank's LVR limits. In extreme cases, banks may issue margin calls requiring you to pay down debt or provide additional security.
Q: Can I release equity if I'm self-employed? A: Yes, but you'll need to provide more extensive income documentation (typically 2 years of financials and tax returns) and banks may be more conservative with their assessment.
Q: Is there a limit to how many times I can use equity? A: No set limit, but each use must meet bank serviceability and LVR requirements. Your borrowing capacity diminishes with each equity release.
Q: What fees are involved in releasing equity? A: Typical costs include valuation fees ($500-$800), legal fees ($500-$1,500), and potentially early repayment fees if breaking a fixed rate term. Some banks charge application or establishment fees.
