What is equity?

Equity is a simple sum. Take what an asset is worth today, then subtract what you still owe on it. A house worth more than the balance of its home loan has equity in it. A work ute worth less than the finance against it does not.

Equity moves in two ways: it builds every time you make a repayment that reduces the balance, and it rises or falls with the market. Because value is a moving number, a formal valuation or an actual sale is what settles the figure.

In a business, equity is what would be left for the owners if every liability were paid off. Accountants call it owners equity or shareholders equity, and it sits at the foot of the balance sheet: assets minus liabilities equals equity.

It takes in the money shareholders originally put in, plus profits kept in the business rather than paid out. Equity can be negative when debts are larger than assets, which lenders, suppliers and auditors all read as a warning sign.

Equity matters to lenders because it shows how much of an asset really stands behind a loan. The more equity you hold, the lower the loan to value ratio, and the more room a lender usually has to say yes.

In Australia, owners often draw on equity in property, plant or vehicles when they refinance or arrange equipment finance to grow. Borrowing against equity adds to your total debt, so the value of the asset and the repayments both have to stack up.