Is your Equity accessible?

 

Equity

If you already own a home, one of the best ways of funding your first or next investment property purchase is to use the equity that you have built up over the years. Equity is created either by the growing value of the property or by reducing the debt or both.

Simply put:

Equity = Property Value less Outstanding Debt

But…not all of your Equity is accessible to use, as your bank will not let you take out the full amount.  Just like when you first purchased the home, your bank will require you to keep a minimum amount of equity or ‘deposit’ in the property. Your original deposit may have been 10% which would have given you an LVR (Loan to Value Ratio) of 90% but over time your LVR will change based on the current value and outstanding debt. Let’s use an example to calculate the current Equity and LVR of a property:

Property Value = $800,000

Outstanding Debt = $500,000

Equity = $300,000

LVR = 62.5%

Under current lending conditions the majority of banks and non-bank lenders are allowing up to 80% as a maximum LVR so if the current LVR of the property is 62.5% there is enough equity in there to be able to access some of it. Your bank will allow you to access the difference between the maximum amount they will lend you (based on their maximum LVR) and the amount of outstanding debt on the property. In other words:

Accessible Equity = Maximum Loan Available less Outstanding Debt

From the example above we can calculate the Accessible Equity from the maximum LVR allowed:

Property Value = $800,000

Maximum LVR = 80%

Maximum Loan Available = $640,000

Outstanding Debt = $500,000

Accessible Equity = $140,000

As you can see, even though there is $300,000 of Equity in the property, only $140,000 of that is accessible, which leaves you with $160,000 as your ‘deposit’ or buffer in the property.

In this example you would be able to apply to the bank to release up to $140,000 of that Accessible Equity and use this to fund the deposit and costs on your investment property purchase (subject to approval and the ability to meet the bank’s serviceability criteria). I talk more in depth about this here.

Note: when you apply to release equity from a property you are not just taking cash out of the property, you are in fact borrowing that money and will pay interest on that amount when you start to use it.

2 Comments

  1. Great article! Didn’t know this, and something that was complex to me is now easy to understand, thanks, looking forward to the next post!

  2. Thats great Michael! Even for someone like me who hears white noise when someone starts talking finance, I get this!!! Look forward to further posts!

Leave a Reply

Your email address will not be published.

*