Property equity is the difference between the current value of a property and the total lending secured against it.
If the property is worth more than the total lending secured against it, the owner has positive equity. If the secured lending exceeds the property’s value, the owner is in negative equity.
Equity is not the same as cash in a bank account. It is also not automatically the amount you can borrow or the amount you would receive after selling.
This guide explains how property equity is calculated, how it can change and what negative equity may mean. If you already understand your equity position and want to investigate additional borrowing, read our guide to releasing equity from your home.
Your equity position may be described as:
Having positive equity does not guarantee that usable equity is available. Any further borrowing remains subject to the property value accepted by the lender, affordability and current lending criteria.
The basic calculation is:
Property equity = current property value minus total lending secured against the property
For example, if a property is worth $800,000 and the total mortgage lending secured against it is $600,000:
$800,000 − $600,000 = $200,000 of property equity
This example shows total equity. It does not establish that the homeowner can borrow another $200,000.
If several loan accounts or properties are involved, the calculation may be more complicated. The complete security and lending structure may need to be reviewed.
The value used in an equity calculation should also be realistic. An online estimate, council rating valuation and lender-accepted valuation can produce different figures.
Read our property valuation guide for more information about how valuations may be used during mortgage lending.
Not necessarily.
The simple equity calculation does not include costs that may arise when a property is sold. These could include real estate agent commission, legal fees, lender repayment or discharge costs, repairs or other sale-related expenses.
The lending secured against the property will normally need to be repaid or otherwise addressed before the lender releases its mortgage security.
The net amount remaining after a sale may therefore be lower than the property’s calculated equity.
If the expected sale proceeds will not repay the secured lending and relevant costs, speak with the lender and a property lawyer before committing to a sale.
Equity may increase when:
Regular principal-and-interest repayments usually reduce the loan balance over time. Interest-only repayments do not ordinarily reduce principal unless additional payments are made.
Property improvements do not always increase market value by the amount spent. Their effect depends on the work completed, the property and the local market.
Equity may reduce when:
A change in property value does not alter the amount owed to the lender. It changes the relationship between that debt and the property’s current value.
Total equity is the mathematical difference between the property value and secured lending.
Usable equity is the portion a lender may be willing to recognise when considering additional borrowing.
A lender may assess:
This means two homeowners with the same amount of total equity may not have the same additional borrowing options.
If you want to investigate usable equity, see how to release equity from your home.
Negative equity occurs when the lending secured against a property is greater than the property’s current value.
For example, if a property is valued at $650,000 and the secured lending totals $675,000:
$650,000 − $675,000 = negative equity of $25,000
This calculation is before any selling or repayment costs.
Negative equity can arise after a fall in property value, particularly when the original borrowing was high in relation to the purchase price. It may also arise or increase after additional borrowing is added to a mortgage.
Negative equity does not automatically mean the borrower must sell the property. Its practical effect depends on what the homeowner needs to do next and whether the loan repayments remain manageable.
If the expected sale proceeds may not fully repay the lending secured against the property, the homeowner should speak with the lender and a property lawyer before entering an agreement. The lender’s agreement may be required before its mortgage security can be released.
Negative equity can make refinancing more difficult because the proposed new lender may not have sufficient property security for the amount required to repay the existing mortgage.
Refinancing also remains subject to affordability, credit history and the new lender’s criteria.
Find out how we can help you review your refinancing options. For an explanation of the steps, lender checks and documents involved, read our mortgage refinancing guide.
Negative equity will normally leave no available security headroom for an ordinary home loan top-up.
Even positive but limited equity may restrict the amount of additional borrowing a lender is prepared to consider.
A homeowner may have intended to use existing property equity to support another purchase. Negative or limited equity can reduce the contribution available and affect the overall security position.
For investment-specific guidance, read our guide to using equity to buy an investment property.
A fall in property value does not, by itself, change the scheduled repayments under an existing mortgage.
However, borrowers who are having difficulty meeting repayments should contact their lender early. Waiting until payments have been missed can reduce the time available to consider possible options.
Start by establishing the facts rather than relying on an old property value.
Property values and loan balances can change. An equity calculation should be treated as a current estimate, not a permanent result.
No. Positive equity means the property is worth more than the debt secured against it.
Usable equity is the portion a lender may be prepared to recognise for additional borrowing after applying its security requirements and lending criteria.
No. A borrower with low equity still has a property worth more than the secured lending. A borrower with negative equity owes more than the property is worth.
Low equity can still affect lending options and may result in additional lender pricing or costs. Read our guide to low-equity margins and premiums for more information.
Principal repayments reduce the mortgage balance and can increase equity if the property value does not fall by a greater amount.
However, interest-only repayments, additional borrowing or a reduction in property value can produce a different result.
Potentially. Negative equity may reduce if mortgage principal is repaid, the property value rises or both occur.
Neither future property-price growth nor the speed of improvement can be guaranteed.
It may provide an initial indication, but it is not necessarily the value a lender will accept.
A lender may use an automated valuation, registered valuation or another approved method, depending on the property and application.
A sale may be possible, but the secured lending and any resulting shortfall must be addressed.
Contact the lender and obtain advice from a property lawyer before committing to a sale if the expected proceeds may not fully repay the lending secured against the property and relevant costs.
Negative equity alone does not mean the lender will take possession of the property.
The more immediate concern is whether repayments are being maintained and whether the borrower needs to sell, refinance or alter the lending.
If you need to understand your current equity position, start with a realistic property value and the complete amount of lending secured against it.
Platinum Mortgages can help explain how your equity position may affect a proposed home loan top-up, refinance or future borrowing request.
Learn more about how we help with home loans, or contact Platinum Mortgages to discuss your position.
Platinum Mortgages New Zealand Limited (FSP752271) is a Financial Advice Provider licensed and regulated by the Financial Markets Authority. Angela Downie (FSP742251) is a Financial Adviser at Platinum Mortgages who provides mortgage advice to New Zealand borrowers under that licence and has worked in the financial industry since 2006.
Angela helps homeowners understand how property values, mortgage balances and lender assessments affect their equity position, including when negative equity may limit selling, refinancing or additional borrowing.
Read our client reviews and learn more about Platinum Mortgages’ industry recognition and awards.
