If you are planning to buy or build a home in Perth, you will probably hear people talk about building equity. In simple terms, equity is the difference between what your home is worth and how much you still owe on your home loan.
For example, if your home is worth $800,000 and your remaining home loan balance is $500,000, your equity is $300,000. That equity is the portion of the property you effectively own, rather than the bank.
Building equity means increasing that gap over time.
How does building equity work?
Equity usually grows in three main ways.
Repayments: Every time you reduce the principal on your home loan, your ownership share increases. Early in a principal and interest loan, a larger part of each repayment often goes toward interest, but over time more of the repayment usually starts reducing the principal.
Property value growth: If the market value of your property rises, your equity increases even if your loan balance stays the same.
Improvements to the home: Renovations, upgrades, or other improvements can also increase the value of the property, which may help build equity if they add real market value. That is one of the ways major lenders explain equity growth.
In practice, these factors often work together. You may be paying down the loan while the property’s value also rises.
When do you start building equity in your home?
You usually start building equity from the moment you buy or build, provided you have an ownership stake in the property.
If you contribute a deposit, that deposit becomes part of your starting equity. From there, equity can continue to build as you reduce the loan balance. If the home’s value rises after purchase or construction, that may add further equity as well.
For someone building a home, equity may begin with the land deposit, the value already held in the land, or the upfront contribution made before and during the build.
What affects how quickly equity builds?
Not everyone builds equity at the same speed. A few key factors make the biggest difference.
Deposit size: A larger deposit usually means you begin with more equity.
Repayment speed: Higher or extra repayments can reduce the loan balance faster.
Property value changes: If the market value increases, equity may grow more quickly.
Value-adding improvements: Renovations that genuinely improve market value may increase equity.
Loan structure: The type and term of the loan can affect how quickly principal is reduced.
This is why two people with similar homes can build equity at very different rates.
Equity is not always the same as useable equity
This is one of the most useful distinctions to understand.
You may have equity in your home, but that does not mean all of it is automatically available to borrow against. Lenders often look at useable equity, which is the portion they are willing to lend against after applying their own limits. CommBank and NAB both explain this using the idea that lenders commonly assess borrowing against around 80% of the property value, then subtract what is still owed on the loan.
So, if your home has grown in value, that can strengthen your position. Access to that equity still depends on lender policy, your income, existing debts, and serviceability.
Why building equity matters
Equity matters because it improves your financial position over time. It gives you more flexibility if you later want to refinance, renovate, or upgrade to another home.
Just as importantly, building equity means you are gradually increasing your ownership in the property rather than simply making repayments without building a stake.