All Topics / Help Needed! / Home Equity

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  • Profile photo of ronnie01ronnie01
    Participant
    @ronnie01
    Join Date: 2013
    Post Count: 54

    Good Evening guys,

    I wanted to ask about Equity, my basic understanding of Equity is the difference between what your home is worth and how much you owe on it so if your home is worth $600,000 and you owe $480,000, you have $120,000 in equity. So using the same example if I was to put a 20% deposit on a $600,000 property ($120,000) does that mean I have instantly a equity of $120,000 and be able to use it to invest in another property? I would like to understand the basics of how this scenario might work as I always hear people using equity to purchase investment properties :)

    Thanks
    Ronnie

    Profile photo of hanoixuahanoixua
    Participant
    @hanoixua
    Join Date: 2007
    Post Count: 19

    If you plan to borrow at 80%. The 120K already tie to the first property. You have nothing left for the next property. You will not get the loan for the next one unless you borrow 100% and have sufficient cash for other fee and charge.
    People often mention use the equity of your home to purchase the investment property. Use your example: your house cost you 600K and you have 120K deposit. After the market moved, your house now valued at 800K. Your loan still at 480K. Therefore, your equity will be 800K-480K = 320K. If you want to keep loan ratio still at 80%, 160K equity still needed to be remained in your house, the different 320K-160K = 160K, you can take out and use to deposit for the next property.

    Hope it make sense.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Ronnie,

    So using the same example if I was to put a 20% deposit on a $600,000 property ($120,000) does that mean I have instantly a equity of $120,000 and be able to use it to invest in another property?

    You are sort of correct – but wait, there’s more….. :p

    To be able to use ALL of that Equity, you would need 100% loan AND extra cash/savings/Equity to cover purchase “costs” of another place.

    Consider this – if you source finance on this place that has $120k Equity, and the financier allows a 90% LVR, then they would lend up to $540k (90% of $600k) – but you already owe $480k, so only $60k is USABLE Equity ($540k – $480k = $60k). But if you can get 100% Loan, then yes, $120k is available.

    In the “usual world” (Mums and Dads) Equity growth happens over decades. e.g. they bought a place in the 80’s, paid $100k for it at the time. They would have been paying down a loan of $80k, and it would’ve hurt back then. By the 90’s it would likely have doubled (so, $200k) and doubled again by the “naughties”, to $400k. Maybe today it is worth $600k. Thirty years later, they have $520k Equity, plus whatever they have paid off the mortgage (probably the full $80k by that time).

    Maybe they chose to utilise some spare equity in the 90’s to buy one investment property? With their $100k house then worth $200k, and needing just a $50k deposit to buy a $250k house, the Equity would be there (after just 10 years). They could have done it again in the 00’s too – as long as they could handle the DSR (Debt Servicibility Ratio) side of things. No problem with LVR (Equity) though.

    As an investor though, we endeavour to “manufacture” Equity so that it grows more quickly – a reno, development, distressed buy, change of use, creative investing, etc. If we simply bought and waited, a positive outcome is virtually assured. Endeavouring to increase Equity brings its own reward, but also its own extra risk.

    The above is also a good clue for those who “wonder why an Interest Only Loan can ever be a good way to go”. Using the above example, I would be thrilled to owe just $80k on a property worth $600k (I had owned it for 30 years, and had always just paid IO). Money saved by not paying down principal might’ve been buying another one (or two, or twenty) over that 30 year period.

    I branched away from your initial question – hope the extra thoughts helped,

    Benny

    Profile photo of ronnie01ronnie01
    Participant
    @ronnie01
    Join Date: 2013
    Post Count: 54

    Hi Guys

    Wow thanks for the information guys and thanks Benny for the other info it help me understand why not just paying off your mortgage for 30 years was the best option, I think I am getting there but still a little confused, so using the same example above if my property is $600,000 and I have $120,000 equity. I than want to buy an investment property worth $300,000 and the lender will lend me 90% LVR $270,000 than how do I use the equity to purchase the $300,000 investment property? Thanks so much for your help, I am a slow learner but I will get there!!!!

    Profile photo of N@than[email protected]
    Participant
    @n-than
    Join Date: 2010
    Post Count: 241

    That’s where a good mortgage broker comes into the equation. There are a few on this forum I am sure one of them will raise their head shortly. Basically they split the original loan and the available equity portion becomes sort of like a ‘deposit loan’ which you can use for your deposit, then your application for the new property is only 80-90% LVR against the value of the property.
    Don’t stress too much on it just leave it to the professionals..

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Ronnie

    There’s “actual” equity and “usable” equity.

    Actual is the difference between the value of the property minus the loan amount.

    Usable is what the bank will let you access. Now they won’t let you borrow 100% of your properties value – the most some will go to is 90%. So using your figures – if the property is worth $600k, you could borrow up to 90% of that value which is $540k (600 * 0.9). Take that $540k and subtract your current loan of $480k ($540k – $480k) and you’ve got an equity release of $60k.

    p.s – borrowing up to 90% will incur LMI though.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of ronnie01ronnie01
    Participant
    @ronnie01
    Join Date: 2013
    Post Count: 54

    Hi Guys

    I think I am beginning to understand so using a similar example if my property is 600k and I have 300k paid off and the banks will lend me 100% LVR than I will have access to the whole 300K to invest in another property? if the bank will only lend me 80% (600,000/0.8= 480,000) 480,000 – 300,000 = $180,000 equity? Is this correct?

    Thanks guys

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Yes that’s correct but the bank won’t lend you 100% on your property (unless it’s tied to another property) so look at 80%.

    So you have $180K usable equity.

    If you buy aqnm IP get an 80% loan (or up to 90% if you don’t mind paying LMI) against it and use this equity for deposits (that way the properties are not crossed).

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Guys

    I think I am beginning to understand so using a similar example if my property is 600k and I have 300k paid off and the banks will lend me 100% LVR than I will have access to the whole 300K to invest in another property? if the bank will only lend me 80% (600,000/0.8= 480,000) 480,000 – 300,000 = $180,000 equity? Is this correct?

    Thanks guys

    Yep – $180k in accessible equity. That’s keeping your LVR at 80%

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Hi Guys

    I think I am beginning to understand so using a similar example if my property is 600k and I have 300k paid off and the banks will lend me 100% LVR than I will have access to the whole 300K to invest in another property? if the bank will only lend me 80% (600,000/0.8= 480,000) 480,000 – 300,000 = $180,000 equity? Is this correct?

    Thanks guys

    And depending on the scenario you can even increase the accessible equity up to 90%.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Modernity InvestingModernity Investing
    Participant
    @mark-coburn
    Join Date: 2006
    Post Count: 181

    Equity, It’s really is the magic ingredient that makes growing a portfolio possible, without growth in a property’s value there is no wealth being created.
    Without growth in equity our only hope to buy the next property is to save every cent for next property purchase deposit or worse, having to sell one to buy another.

    Luckily, equity is a very simple concept to grasp. At its most basic it simply means the amount a property is worth minus the amount owed on it.
    However, not all the equity can be used because generally banks will only loan 80% of a property’s value, just in case it loses value. So the ‘useable equity’ is the amount the property is worth minus 20% and then minus the amount still owing.

    Case Study

    The sample property is valued at $450,000, the owner has a mortgage balance of $220,000 owing.

    Owner’s equity: The property’s value $450,000 minus mortgage ($220,000) = $230,000

    Useable equity: The property’s value $450,000 minus bank’s 20% ($90,000) = $360,000

    Borrowing capacity: $450,000 (property’s value) minus $90,000 (bank’s 20%) = $360,000 (useable equity) minus $220,000 (mortgage balance) = $140,000

    Leaves us with an accessible equity of $140,000 (the amount you can borrow)

    Leaves us with an actual owner’s equity of $230,000 (the amount you will receive from the proceeds of a sale*)
    Why is it so important?

    This accessible equity can be used as a deposit on an investment property. The equity can be used to put down a deposit on your next investment property, to cover legal costs and stamp duty.

    Accessing your equity

    The most straightforward way to setup your debt is to us a loan called a Line-Of-Credit. This keeps the debt secured to just one property, but you can take the cash from the Line-Of-Credit to put down as your deposit on your next purchase.
    At settlement the new mortgage is drawn down to cover the remaining cost of the property purchase.
    And the process just keeps working. The faster a property increases in value the sooner the equity can be accessed to purchase another property. This rise in value is the golden egg that all property investors are looking for.

    Equity can be generated by both an increase in the market value of the property and through a decrease in the amount owed on the mortgage.

    * less selling costs, etc.

    Modernity Investing
    Email Me

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