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.
What Is Equity? Equity is the portion of your property you truly "own"—the difference between market value and outstanding mortgage.
Calculation:
How Equity Grows:
Example of Growth:
Total Equity: The complete difference between value and debt.
Usable Equity: The amount you can actually access, limited by bank LVR restrictions.
Calculation:
Most banks lend up to 80% LVR:
Banks typically limit to 70% LVR for equity release:
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 |
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.
Situation:
Equity Calculation:
Process:
Situation:
Equity Calculation:
Process:
Situation:
Equity Calculation:
Process:
If property values fall, your equity shrinks:
Using all available equity leaves no buffer:
More total debt means:
If properties cross-collateralized:
Taking maximum equity can:
| 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 |
Don't use maximum usable equity:
Model scenarios:
Can you still manage? If not, reconsider.
Unless rates significantly better with cross-collateralization:
Especially for family arrangements:
Before using equity, understand:
Using Equity for Investment:
Capital Gains Considerations:
If equity strategy doesn't suit your situation:
Don't use equity if:
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.
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.