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How much equity you actually need to consolidate debt

Equity is what the property is worth less what you owe on it. Usable equity is a smaller number, and it is the one that decides whether a consolidation can go ahead.

Blair Jones

Blair Jones

Customer Relations Manager

· 8 min read

A property plan and measurements laid out on a desk, the kind of detail a valuer works from when equity is being assessed.

Equity, and the smaller number that matters

Equity is simple arithmetic. It is what the property is worth, less what is still owing against it. If you have owned the place for a while and paid down the loan, that gap can look substantial.

Usable equity is the number a lender will actually work with, and it is always smaller. No lender will release the full gap, because doing so would leave nothing between the loan and the value of the security. Australian lenders draw the line by loan-to-value ratio, and the ratio is calculated on their own assessment of value, not on yours.

That distinction catches people out more than any other part of this process. A homeowner arrives certain there is a large sum available, and leaves with a smaller figure that still does the job, or occasionally with a figure that does not. Better to know which one you are dealing with in week one than in week six.

Equity
What the property is worth less what is still owing against it. Arithmetic, not policy.
Usable equity
The part of that gap a lender will actually lend against, once its ceiling and its own valuation are applied.
Loan-to-value ratio
The loan expressed as a share of the lender’s assessed value. Every equity decision is made on this number rather than on a dollar figure.
Lenders mortgage insurance
A one-off premium paid by the borrower that insures the lender, not the borrower, against loss. It usually applies above the standard ceiling.
Cash-out
Releasing equity as funds rather than simply refinancing an existing balance. Lenders keep a separate policy for it.

The 80 per cent line and what sits above it

Most Australian lenders treat 80 per cent of assessed value as the standard ceiling. Borrow up to that point and the loan is priced and assessed as a conventional mortgage. Go above it and lenders mortgage insurance usually enters the picture, which is a one-off premium paid by you to insure the lender against loss.

For a debt consolidation the 80 per cent line matters twice over. It caps the total lending, and it also governs cash-out policy, because most lenders tighten considerably on releasing equity once the loan crosses that threshold. Some will not release funds above 80 per cent at all. Others will, with a narrower set of acceptable purposes and more evidence.

An illustration only, expressed as shares of the lender’s assessed value rather than dollars. Every lender applies its own policy, and your own figures will differ.
LineShare of assessed valueWhat it means
Assessed value100%The lender’s valuation, not an agent’s appraisal or an online estimate.
Standard lending ceiling80%The usual point beyond which lenders mortgage insurance applies.
Existing mortgage balance62%What is already owing against the security.
Usable equity before costs18%Eighty less sixty-two. This is the pool a consolidation draws from.
Equity above the ceiling20%Real, but not generally available without insurance and a stronger file.

Equity gets you the security, servicing gets you the loan

Equity and borrowing capacity are two separate tests, and a file has to pass both. Equity answers whether there is enough property behind the loan. Servicing answers whether the income can carry the repayment.

What equity answers

  • Whether there is enough property standing behind the loan.
  • Measured against the lender’s own valuation, not an agent’s appraisal or an online estimate.
  • Improved by paying the mortgage down, and by the property moving in value.
  • Largely settled on the day the valuation lands.

What servicing answers

  • Whether the income can carry the repayment when it is tested at a buffered rate.
  • Measured against declared living expenses and every commitment showing on the file.
  • Improved by clearing debt, because a closed limit leaves the calculation entirely.
  • Can move between application and settlement if income or commitments change.

Lenders do not assess servicing at the rate you would pay. They add a buffer on top of it, so the repayment is tested against a higher rate than the one on the loan contract. The size of that buffer follows regulatory guidance and changes from time to time, so ask what the current figure is rather than assuming last year’s. They also add a margin to the assessment of most other debts you hold.

The useful consequence is that clearing debt improves servicing. A card with a limit is assessed on the limit, not the balance, and usually at a monthly figure calculated as a percentage of that limit. Close the card at settlement and that assumed commitment leaves the calculation entirely. It is one of the reasons a consolidation can be approved when a straight top-up would not be.

How the lender decides what the property is worth

The valuation is ordered by the lender, paid for through the application, and performed by a panel valuer who is instructed by the lender rather than by you. There are three common types, and which one you get is a policy decision made on the file.

  • Automated or desktop valuation. Data-driven, no visit, and usually reserved for lower loan-to-value ratios and straightforward suburban property.
  • Kerbside. The valuer inspects from the street to confirm the property exists, is in reasonable order, and matches the description.
  • Full inspection. Internal and external. This is the common requirement where equity is being released for a consolidation, and it is the one that takes the longest to book.
A suburban home read the way a panel valuer reads one, against recent comparable sales rather than an owner’s expectation.
The valuer is instructed by the lender, not by you. Where the figure lands short, there are two practical moves: submit further comparable sales for reconsideration, or test a different lender’s panel.

A valuer works to comparable recent sales, not to what the property is listed for or what a neighbour was told. If the figure comes back lower than expected, there is sometimes room to submit further comparable sales for reconsideration. Sometimes another lender’s panel produces a different number, which is one of the practical reasons a broker with a wide panel is useful here.

Why lenders ask what the money is for

Releasing equity is called cash-out, and lenders treat it as a higher-risk purpose than a straight purchase or refinance. Every lender has a policy on how much cash-out it will allow, at what loan-to-value ratio, and with what evidence.

Debt consolidation is generally a well-regarded purpose, because the money is going to a known creditor and the outcome is a simpler balance sheet. It is also an evidenced purpose. Expect to supply statements for every debt being cleared and a payout figure for each, and expect the lender to pay several of them directly at settlement rather than depositing funds into your account.

That direct payment is not a lack of trust. It is how the lender satisfies itself that the loan it approved is the loan that settled, and it removes a step from your week. Tax debt is often handled the same way, with the payment going to the relevant Australian Taxation Office account rather than to you.

The costs that come out of the equity first

The usable figure is not the figure that reaches your creditors. Several costs come out along the way, and they should be in the plan from the start rather than discovered at settlement.

  • Discharge or release fees charged by the outgoing lender.
  • Application, settlement and valuation fees on the new loan, which vary considerably by lender.
  • State government mortgage registration and discharge fees.
  • Break costs, if any part of the existing loan is on a fixed rate. These can be significant and are calculated by the lender on the day.
  • Lenders mortgage insurance, if the new loan takes the total above the standard ceiling.

What an $80,000 equity pool actually delivers

The pool is not the payout. Here $8,000 of the $80,000 funds the cost of moving, so the debts going into the consolidation have to be chosen against $72,000. Deciding that in week one is what keeps the plan intact at settlement.

Illustrative projection only. Not a quote and not an offer of credit.

View as a table
ComponentAmountShare
Reaches your creditors$72,00090%
Break cost on the fixed portion$4,8006%
Application, valuation and settlement fees$1,9002%
Government registration and discharge$1,3002%
Total$80,000100%

Ask for these in writing before you commit. A broker should be able to lay out the full cost of moving alongside the benefit of consolidating, so that you are comparing the two honestly rather than looking only at the repayment.

Figures being checked line by line before a consolidation is sized, so the cost of moving sits next to the benefit.
Size the loan to payout figures, never to balances. A payout includes interest to the day, any fees, and on a fixed facility a break cost calculated on the date it is requested.

When the equity is not there

Sometimes the numbers do not reach. That is a real answer and it is better delivered early. It is also rarely the end of the conversation, because there are structures that work on a thinner margin.

When the debt pushes the loan past the ceiling

An existing loan at 74 per cent of value looks comfortable until the debt is added and the total lands at 88. Nothing has gone wrong; the file has simply moved out of standard policy, which is where the options below start to matter.

Illustrative only. Every lender sets its own ceilings and its own policy above them.

View as a table
BandUp to
Standard80%
LMI territory90%
Specialist100%
Total lending against assessed value88.0%
  1. 01

    Re-test the value

    A different lender’s panel can return a different figure. Where the first valuation looks out of step with recent comparable sales, that is worth exploring before anything else.

  2. 02

    Consolidate part of the debt

    Clearing the highest-cost balances alone can restore cash flow, even if the full amount will not fit inside the ceiling.

  3. 03

    Look at a second mortgage

    A second mortgage or a private facility sits behind the existing first. It is priced for the risk and is generally a bridge to a conventional refinance, not a destination.

  4. 04

    Use business or asset security

    Commercial property, plant and equipment can carry debt that the family home cannot. This is often the better answer for a trading business.

  5. 05

    Get the right advice on the rest

    If the debt genuinely exceeds what any structure can carry, an accountant or a registered insolvency practitioner is the correct person to speak to. WeL’nd will say so rather than dress up a loan that will not hold.

FAQ

Questions people actually ask

If yours is not here, ask it. We would rather answer the awkward one early than have you find out later.

1300 015 267
How much equity do I need before a consolidation is possible?
There is no single threshold, because it depends on the size of the debt, the value of the property and the lender’s policy. As a working rule, the pool available is the difference between 80 per cent of assessed value and what you currently owe. If that pool covers the debts plus the costs of the move, the structure is generally workable.
Can I borrow above 80 per cent of the value to clear debt?
Some lenders allow it with lenders mortgage insurance, and the policy on cash-out above that level is tighter than below it. Whether it is available depends on the strength of the whole file, not on equity alone.
Does the lender use my valuation or its own?
Its own. The valuation is ordered by the lender from a panel valuer, and an agent’s appraisal or an online estimate carries no weight in the assessment. You can usually see the valuation figure once it is returned.
Will having equity guarantee approval?
No. Equity satisfies the security test only. The loan also has to pass servicing, credit history and the lender’s responsible lending assessment. Plenty of applications with strong equity are declined on servicing, and no broker can promise an approval.
Does consolidating debt use up equity permanently?
It converts equity into a larger loan balance, so the equity reduces at settlement and then rebuilds as you pay the loan down and as the property moves in value. Paying more than the minimum on the consolidated portion rebuilds it faster.
What if the property is in a company or trust name?
It can usually still be used as security, though the structure changes the documentation and the lender options. Bring the trust deed or company documents to the first conversation so nothing stalls later.

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