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Equity Explained Easily

Do you often wonder how people can buy an investment property if they don’t have savings or they don’t want to use any savings that they may have? If you already own a home, equity could be your new best friend!

Equity = the value of your property minus the loan amount attached to it.

For example – my house is worth $600,000 and I owe $355,000 to the bank.

I have $245,000 of equity.

That all sounds great but the important question is ‘how can I use equity to buy a house or an investment property’?

If you want to buy an investment property, you can access 80% of your home’s equity which is then used as security, which means you don’t need to find a deposit. I can almost hear your thoughts right now!  Amazing right?!

Why only 80%?  Because that’s what the banks will generally give to you. You can possibly access more but you’ll need to pay for something called Lender’s Mortgage Insurance. I’ll touch on this in another post.

As a quick guide to calculating how much you can actually borrow from the bank to buy a property, a very simple way to do this is by taking the usable equity amount (the 80% figure) and multiplying it by 4. Don’t ask my why we multiply it by four. I know there is some maths behind it but I just consider it as a general rule of thumb in the property world.

Using my example above, this is how we would calculate it:

Equity = $245,000
Usable equity = $196,000 (80% of $245,000)
Possible loan amount = $784,000 ($196,000 x 4)

Now this all sounds fantastic, but it’s important to remember that just because you have equity in your home (or in other investment properties), doesn’t necessarily mean that you can borrow against it. The bank will take into account your income, any kids or dependents that you have, any debts you have and heaps of other things. So make sure you speak to your financial broker about all of this before going out and securing a property.

So if you’ve been thinking that you can’t buy a property because you don’t have any money, think again!  Let’s look at what you can do right now to perhaps turn all of that around:

1. Get a valuation done on your current home (or investment properties if you have any)

You can go to your bank at any time and request a valuation. Usually you can only get them done once every 12 months and when you do, you always hope that the value of the home is MORE than what you paid for it.

2. Calculate how much equity you have available to use

Do this using the example above. Remember that these figures are a rough guide and you’ll need to go to your financial broker or bank to confirm how much they’re happy to lend to you.

3. Organise a new loan (remortgage)

When you do this you’ll be remortgaging your existing loan and accessing your usable equity at he same time. You can access the equity in a few ways but most commonly it will via a line of credit (basically just a big credit card), or access a lump sum of money. I’ve been through this process many times and you usually end up with lower monthly repayments and access to all of your usable equity – win win!

If you’re in a position where there isn’t much difference between the value of your property and the bank loan attached to it, you can look at a couple of different ways to increase this gap and start to build equity:

  • pay off more of the loan by making extra repayments
  • renovating the property as a way of increasing its worth
  • or use the slow method and wait until the value of the property goes up (I’m too impatient for this!)

As your property portfolio grows you continue to access equity at every opportunity because that is what allows you continue to buy more property.

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