All Topics / Finance / Home equity confusion – please help clarify!

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  • Profile photo of TigerstripesTigerstripes
    Participant
    @tigerstripes
    Join Date: 2015
    Post Count: 2

    Hi all,

    I’ve yet to purchase an IP, but am looking to get started.

    I have a lot of equity in my PPOR ($600k at 80% LVR), but if I was in a situation where I didn’t have any equity (i.e. renting) and went for a straightforward home loan, I’d could probably afford around $380k max.

    Now, even though I could potentially access $600k worth of home equity, I could still only afford to service up to $380k of it anyway, right? So it appears my equity is completely useless at this initial stage of the game – just seems like a regular home loan to me.

    Have I got this wrong? Is there any advantage to having equity when starting that I’m not seeing?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Hi Tiger

    Firstly welcome to the forum and I hope you enjoy your time with us.

    When you purchase an investment property you have your PAYG income as well as the rent on the new property to be taken into consideration when assessing serviceability.

    As the buyer however you are able to claim additional deductions both cash and non cash deductions which offset the expense and reduce your Taxable income.

    All of this is no good at all if you do not have sufficient equity to enable you to start your investing journey.

    Who has told you that you cannot service an investment property ?

    A investment orientated broker should be able to assess your situation and provide suitable credit advice.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Tiger,
    The main thing you are seeing is how there are two major “parts” of any Finance Deal. One is LVR the other is DSR. And either one can limit you.

    Richard, or other Mortgage Brokers on here, can take you chapter and verse through the complexities of all this.

    Right up, I’d say you are in GOOD shape with $600k of equity. Yes, the DSR side of things might slow things down with the size of a loan, but then, the right purchase could see you able to make a second purchase right after that.

    Take the time to learn all of this for your own benefit. It helps to have some understanding which will occur as you meet/talk with others like Richard. And welcome aboard – I hope your search for more info is a fruitful one,

    Benny

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

    Hiya

    Benny is spot on.

    The two major factors banks look into is the deposit (or in your case equity) and an ability to repay the debt (borrowing capacity).

    You could own parliament house and have $1 billion in equity – but the bank is only going to lend to you what they think you can afford….which is based of your income (PAYG or self employed earnings plus rental income) minus your liabilities and expenses.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of TigerstripesTigerstripes
    Participant
    @tigerstripes
    Join Date: 2015
    Post Count: 2

    Thanks for the responses. Still scratching my head though :/

    Who has told you that you cannot service an investment property ?

    Nobody has told me that I can’t service an investment property. What I’m saying is that – from what I understand – the maximum sized loan I can afford repayments on is $380k, so would that not mean I could only afford to access $380k of my equity rather than the full $600k for my initial purchase/s?

    You could own parliament house and have $1 billion in equity – but the bank is only going to lend to you what they think you can afford….which is based of your income (PAYG or self employed earnings plus rental income) minus your liabilities and expenses.

    This is exactly my point. So that makes anything over the $380k mark inaccessible because I just can’t afford it, meaning the extra $220k I have in equity is useless for now, no?

    Dustin McMahon
    Participant
    @dustin-mcmahon
    Join Date: 2015
    Post Count: 3

    Unfortunately if you can’t afford it you are correct a bank won’t lend the money to you even if you do have the equity as bank don’t wnat to be selling that equity to get thier money back.

    However Richard was asking you who told you that you cannot service, as there are many different lenders who all have different calculators. If you are working out that you can afford $380 on your income then you may be able to borrow a lot more depending on what income you receive from the property you purchase.

    depending on what you purchase you would only want to access the deposit and purchase cost from your PPOR anyway the rest should generally be secured against the investment you purchase.

    regards
    Dustin McMahon 0430 110 304
    [email protected]

    Dustin McMahon | Nectar Mortgages
    http:/nectarmortgages.com.au
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    Profile photo of Don NicolussiDon Nicolussi
    Participant
    @don
    Join Date: 2005
    Post Count: 1,086

    Is there any advantage to having equity when starting that I’m not seeing

    Tiger, Well in short yes it really makes a massive difference. On the one hand the bank does look at your overall financial position. Assets and liabilities. The whole picture.

    Sure high Loan to valuation ration LVR lending ( 95% investment loans ) is still available but having equity means that your finance broker will be able to structure a series of loans for you that do not involve LMI or lenders mortgage insurance.

    * Some lenders use LVR to determine the rate they charge you – or the discount you can negotiate
    * Yes your income will limit your borrowing but your equity will assist in helping you achieve a better loan structure, products and prices ( interest rates) and even fees. Your broker will be able to negotiate many aspects of what you end up paying. The stronger your position the better it is for you.

    • This reply was modified 4 years, 8 months ago by Profile photo of Don Nicolussi Don Nicolussi.

    Don Nicolussi | Mortgage Broker - Home Loan Warehouse
    http://homeloanwarehouse.com.au
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    "I think of finance as a technology, a way of getting things done." Robert Shiller

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi Tiger

    You’ve hit on a point that a lot of people struggle to understand. Indeed equity is not defined as your right to a cash donation from the bank just because your house went up in value (that’s right – some folks mistakenly think they get paid by the bank because their property went up in value, and do not understand that accessing equity is a borrowing event which must be repaid). It is also the case that just because you have equity, it doesn’t guarantee the bank will lend against your equity. There is indeed such a thing as “more equity than you can use”. In these situations, the only way to crystalize the equity gain is to sell. However if your objective was to amass a property portfolio, this would be pointless because you would then just need to sink your money back into the property market.

    Possibly the only way to utilise more of your equity than you can presently afford is to sell your home and downsize your PPOR to something with a lesser price, and sink the remaining money into deposits on well-yielding investment properties.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

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