Can someone explain the use of equity?
In layman's terms!
, Jan 18 2013 12:43 PM
13 replies to this topic
Posted 18 January 2013 - 12:43 PM
Hi, hoping that someone can explain simply to me how you can use the equity in your home to buy, in our case, a block of land.
How do our repayments change, and is it worth it? I am confused as to how you can use the (equity) amount and what it costs.
Pretty ignorant, hoping there are some clever clogs out there to explain to a dummy like me!
Posted 18 January 2013 - 12:49 PM
You buy a house for $400 000. You pay off $200 000.
You have $200 000 in equity. This is the difference between the amount your asset is worth and what you owe on it.
This is also called the Loan to Value Ratio or LVN. Another way to look at is savings that you can't withdraw.
So, because you have $200 000, you can use this money as a deposit to buy other things. If you don't want to sell your house to get the cash itself, you use the asset (your home) as security for any loan you get for other things.
So, let's say you buy an investment property for $400 000.
The loan for that investment property is secured against not only the investment property itself, but your home. If you default on the repayments, the bank can take your home to repay the debt.
Equity increases your capacity to borrow money for other things. It doesn't do much else.
Posted 18 January 2013 - 12:52 PM
Thanks so much BetteBoop! That explains it really well.
Posted 18 January 2013 - 12:59 PM
House worth $500k
Loan of $300k
Equity of $200k.
The bank will (subject to all the usual criteria) loan you up to the $200k to invest/spend.
It may be a new loan account or added to your old one depending on how you set it up but in terms of repayments think of it as a new loan of $X to work out how much extra it will cost.
Posted 18 January 2013 - 02:03 PM
The bank will usually only lend you up to 80% of the value of your property (excluding LMI) so if your property is with 400k and you owe 200k yo could borrow another 120k. You could either put you house as security against another investment property, or just take out 20%, the deposit required for an investment property, out of your home loan, and then have the investment property as its own security without using you homes title against the property. You would need to speak with a tax specialist and work out the the way that would be the most tax effective (if any difference at all)
Posted 18 January 2013 - 02:17 PM
Also don't forget to take into account the current worth of your property also.
So say you bought the house 15 years ago for $400000
You have paid off $200000
But in that time the value of your house has increased to say $600000
Which means your equity is actually $400000
Posted 22 January 2013 - 06:58 AM
Thank you all very much!
Rethinking the idea now..
Posted 22 January 2013 - 07:05 AM
Beetlebop summed it up nicely.
We did exactly this to purchase our house, we had no deposit as we werent planning to buy yet but DP had a unit at the time worth about $350,000 (in his name only) and a fair bit of equity in it and also the rent received on it almost covered the mortgage repayments at that time, and now actually is more than the repayments. We both had decent paying jobs and our repayment capacity along with the equity in his unit (used more as security, rather than actual $ towards the next property) was enough for the bank to lend us the full $400k required to purchase our house.
We later used equity in our house to purchase another investment property.
Its quite risky and you have to be sure you can cover repayments should unforeseen things happen and your property remains untenanted or something, but for us its worked out very much in our favour.
Its a bit weird to think I've never actually saved for a property but have three of them.
Posted 22 January 2013 - 07:09 AM
Do be careful neighbors of ours last year lost their house and rental property when the tenants they had trashed the investment house, leading to no rent coming in and big repair cost.
They now have a much smaller unit and they are having to start again in terms of saving for retirement. (lucky for them their the unit and house sale gave them just enough to cover debt and buy again)
Posted 22 January 2013 - 07:20 AM
We've been wondering about this as well. On paper, we own our home outright, but in reality, we owe a family member approx 300K. We have an arrangement to repay this loan, interest free. We bought our home for $750K 12 months ago, so I imagine the value of our home would not have changed much.
We have a small amount of savings, but will need to purchase a new family car this year, and are hoping to do alterations and additions to our home within 5-10 years. We are currently not adding to our savings because we are on one income (i have been on mat leave for 21 months and will be for another 12 months with DS2 arriving in May). We have just starts thinking about seeing a financial advisor, because surely with our financial position there should be something we can do?
Sorry to hijack your thread, OP! Just something we are interested in as well.
Posted 22 January 2013 - 07:25 AM
Edited by ~spirited~, 22 January 2013 - 07:26 AM.
Posted 22 January 2013 - 07:38 AM
No problem Spirited!
Yes, it is a bit of a confusing area..
I don't know if we want to go down that track now, as we weren't going to buy an investment property, it was going to be a block of land somewhere to build on at a later date, so no rent money coming in to cover repayments.
Oh well, back to the drawing board..
Posted 22 January 2013 - 07:46 AM
Yeah, I think we'd do it for an investment property, and ideally the mortgage repayments would be covered by the rental income! Unless we reduce the amount we repay on our current loan (which we could probably do) we don't have enough income to cover any additional expenses until I return to work (looking at April 2014).
Good luck Beth, I hope you get your block of land! I'd love to build my dream home
Edited by ~spirited~, 22 January 2013 - 07:47 AM.
Posted 22 January 2013 - 07:48 AM
Yeah, it sounds like it might be a tricky time to do it..
As a PP said, equity really only gives you the opportunity to borrow more money, it isn't the actual money IYKWIM! (The PP said it much better!!)
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