Equity, this word is used all the time in property and lending businesses, but
What exactly is EQUITY????
This report will reveal to you how Equity works PLUS How to use this Equity.
We will show you an example and answer some of borrowers frequently asked questions.
Equity in short, is the difference between the saleable value of a property and the amount of money still owed to the lender. What you need to do is subtract a minimum of 5% of the value of the property as well as the loan balance, then what you have left = Equity. An example is:-
Example Property Saleable Value = $350,000
Less 5% of the Saleable Value = $ 17,500
Less current balance of mortgage = $150,000
EQUITY VALUE $182,500
This Equity Value can be borrowed against to allow you to invest in additional properties or it can be drawn as cash funds to provide a deposit for the purchase of an additional property. Why do I have to leave 5% value and Why would I want to draw cash and not just borrow against my existing property??
Firstly, the answer to this question "Why can I not use the full 100% of the value of my property?" Very few lenders will lend borrowers the full 100% value of their property. They like to retain a minimum of 5% of the value of your property, to provide a buffer zone, which means if the property was sold there would be enough to clear the debt . It is important to note that with loans that have less then a 20% equity buffer, Lenders Mortgage Insurance (LMI) will be taken out by the lender to cover the lender against any loss incurred ( see separate web article What is Lenders Mortgage Insurance ) . This is again to protect the lender however, the premium for this insurance, is paid by you the borrower and for investment property purchases is tax deductable ( always check with your accountant for the latest ATO tax rulings).
Secondly, "Why draw cash and not just borrow against my existing property?" This choice depends on, to some extent, your long term goals regarding investment properties. If you choose to just borrow against your existing property to purchase another, this means, that you will have to use the same lender to borrow the funds for the additional purchase because they hold the current mortgage and will be using the value of both properties to secure both loans. However, if you draw cash you are free to choose another lender, because each property is secured independently ( called stand alone in lending terms) from the other. This may be a better structure for you personally as it will allow you to sell either property without having any impact on the remaining property. There are several variables that may effect which way you proceed. Things like, how long you intend to keep the properties, before selling either one or all of them, or if you intend to use future equity on either properties to buy yet another property.
Our very experienced lending team are only to happy to provide you with any information you may need, to enable you to make an educated decision and choose the right path to suite your personal requirements. We are dedicated to help you achieve your goals and will show you all the alternatives you have available to help you make the right choice.
Call us anytime 1300 308 105 and make a FREE, no obligation appointment to discuss your needs.
We Look forward to hearing from you .