Equity Is Not Liquidity: The Costly Assumption Many Investors Make

One of the most common mistakes I see property investors make is assuming that equity equals liquidity.

It doesn’t.

Just because your portfolio has grown in value doesn’t mean you can access those funds to buy again.

Equity is the difference between what a property is worth and what is owed to the bank. On paper, equity can look impressive. But equity only represents potential, not cash. It only becomes usable if a lender is willing to lend it to the borrower.

And this is where many investors come unstuck.

Liquidity is about access. It’s about whether funds can actually be accessed quickly toward a purchase. Equity, on the other hand, is locked inside property and governed by lending policy, serviceability rules, and risk buffers. It is also entirely dependent on the borrower’s creditworthiness, (or desirability as a borrower to the bank). If credit conduct has been poor, the borrower will likely face challenges, and this includes unpaid telco bills, late credit card fee payment and other typical credit blemishes.

I often meet investors who say, “We’ve got plenty of equity, so we’re ready to buy again.”
But without confidence from a bank or a broker on their future lending eligibility, the reality can be sobering.

Income hasn’t kept pace with property growth. Existing loans are already stretching servicing. Interest rates have increased. Lifestyle costs have crept up. The result of this for many Australians is strong equity on paper, but very limited borrowing capacity.

In these situations, equity exists, but liquidity doesn’t.

Only this week, I spoke to four prospective clients, all of whom were seeking my advice for their next investment property. Each person had also chatted to other buyers agent firms, some of which clearly didn’t understand the difference between equity and liquidity.

One prospect wasn’t employed, but had a nest egg of money from a late relative. Another had also received an inheritance and was employed, but their employment type was potentially more challenging for a lender to assess and approve an investment loan to. One had a great pool of savings but a very modest income. Another had strong equity, but had reached their maximum borrowing capacity only recently, and had since reduced their employment hours to enjoy more time with their children. Each of these prospects were told by other firms that they could invest immediately, and with consecutive purchases. None had spoken to a lender or a strategic mortgage broker about their plans.

Some of these buyer’s agents had simply told them “you have equity. Let’s purchase.”

The distinction between equity and ability matters greatly. Equity can only be accessed by borrowing, and borrowing requires servicing. If the bank isn’t satisfied that a borrower can comfortably meet their repayment obligations, their equity remains locked away.

This doesn’t mean that they won’t have access to the equity in the future, but accessing and borrowing this equity would rely on the following changes.

• An increase in income, (employment, contract, higher rents, dividends, bonuses, etc)
• A decrease in interest rates
• A sharp policy change from a lender, (unlikely, but it can happen)

A windfall won’t help a borrower access more equity, (unless it is invested and the returns are added to their income figure).

This explains why two investors with similar portfolios can have very different outcomes. One continues to acquire, upgrade and move strategically. The other stalls, despite owning valuable assets.

The difference isn’t asset quality, nor is it equity. It’s serviceability.

For investors, the message is simple but critical. No investor should assume that portfolio growth automatically equals buying power. Before planning a next purchase, borrowers need to understand what portion of their equity is actually usable and whether they have true liquidity to act.

In today’s lending environment, clarity beats optimism. Equity is valuable, but only liquidity allows an investor to move to the next acquisition.

Side note: As much as some sharks or creative buyer’s agents purport that trusts can solve the borrowing capacity issue, there is no real shortcut around borrowing capacity constraints. Anyone offering this type of advice is stepping into a regulated space and placing their clients at greater risk. To compound the issue, trusts require a director’s guarantee and many don’t comprehend what this all means for a borrower. Investors should note that a buyer’s agent should never be giving advice around trusts or SMSF. This is a licensed product and unless the buyer’s agent holds a relevant Australian Financial Services License, (AFS) it is only the job of a qualified accountant or financial planner to advise about trusts and SMSF. An experienced and knowledgeable buyer’s agent will understand the restrictions that apply when it comes to property selection however.