For instance, if your home is worth $1 million, and your home loan is $600,000, you have $400,000 in equity.

Equity is not like money in the bank; it’s only “on paper” wealth. You can’t use it to pay for your groceries. (This is how many Kiwis end up “house rich, cash poor”, where they have lots of equity but very little cash to pay the bills).

But you can tap into your equity so you can spend it on other things. The most common way to do this is by increasing or “topping up” your home loan. For instance, consider that million-dollar house: you could apply for a top-up loan to $800,000 (typically 80 per cent is the maximum usable equity). That would give you an extra $200,000 to use as a deposit on a rental property. Or you might increase your loan by $40,000 to buy a car.

You can also use your equity to help your children buy a first home. Most of the main banks have options where you can work alongside your kids to help them buy a first house.

Reverse mortgages

Finally, a reverse mortgage is also a way of spending your equity if you are beyond retirement age and you need extra income.

If you need to fill out a home loan application, it usually requires you to have a plan for the lending. If you have revolving credit, though, you can draw that money down to spend on anything you like.

It seems obvious, but if you tap into your equity, you’ll need to service the extra debt you’ve taken on (make the repayments). Sometimes people make it sound super easy to buy a rental, with “no money down”. This is almost always using your equity to pay the deposit and getting another loan for the rest of the purchase price.

You might not need a big chunk of cash, but you have to service the debt on 100 per cent of the value of the rental – it could be expensive.

Using your equity can be risky. You don’t want to find yourself “upside down”, where you owe more than your assets are worth. Make sure you understand the risks before you jump in.