What does equity mean? How can we use it?

Many successful property investors monitor their portfolio annually. They take note of their income & growth returns and look at what equity is available to expand their existing portfolio.

Many first time property investors become complacent to owning one as they have limited resources to professionals who can help them. In this market insight, we take the opportunity to explain what equity means and how we can use it.

What is equity?

In short it is the difference between your property value at and what money you owe on it to own outright. To elaborate, if you own a property valued at $850,000 and you owe a mortgage worth $150,000, you essentially have equity of $600,000.

What is available equity and how do you find out?

The most appropriate way to calculate how much equity is within your property, is to have it valued by a bank/lender. Once the bank has valued the property, they essentially allow you to borrow between 80%-90% of the property value. This is also known as a lending variable ratio (LVR). Taking the earlier example, if the property was valued at $850,000, the bank will allow you to borrow $680,000 (80%) – $765,000 (90%) of that asset value in debt. This will be subject to the bank using the property as security.

After determining the valuation and LVR, we can now calculate how much equity can be used to expand on your property portfolio. This is also known as available equity. If we proceed with an LVR of 80% we are able to borrow a loan amount of $680,000. As the property is already mortgaged at $150,000 you essentially have available equity of $530,000. This is calculated as follows:

Property valuation $850,000
Loan amt (80%) $680,000
LESS: Current loan $150,000
TOTAL: Available equity $530,000

Understanding your equity helps you make better decisions when sourcing a property. However it doesn’t mean you need to use all of it at once. As a result, ensure you invest within your own affordability.

What is so good about available equity?

For most people, buying property is a priority at some stage in life. However obtaining a cash deposit can be very challenging. Saving for a cash deposit is often reduced as the property market generally increases more than your savings account. This is why identifying your available equity is very beneficial. It consequently fast tracks your ability to buy another property. The hardest property purchase is generally your first. You are often restricted to contributing cash as a deposit rather than equity.

Do all properties accumulate equity?

Over the long term, most properties provide capital growth. However not all properties accumulate in value equally. Location is no cliche. Location has a great deal to do with accumulating capital growth and in turn available equity. Therefore better property selection can provide more equity sooner and advance to buying your next one.

Are there any other ways to accumulate equity?

Yes there is… If you maximise your cash flow, you can reduce the mortgage faster than just meeting the minimum loan repayments. By reducing the loan balance, this will accumulate available equity, even if the property does not grow in value. It comes down to how dedicated you are at paying the loan down faster resulting into available equity. If you take advantage of reducing your mortgage and property appreciation you’ll access a greater level of equity in a shorter time frame.

What should we buy if we have equity?

In summary the answer will differ for everyone. Before expanding your portfolio, you want to be sure you can afford the next property. If we take the earlier example into consideration, having equity of $530,000 can be spent on buying one property or potentially two. When buying a new property, you’ll be able to borrow against it, using the new property as security. This is where you should obtain advice from your mortgage broker or financial planner. Having $530,000 can be exciting, but you still need to make sure you don’t over budget. Some buyers may also consider using half of their equity to buy a property and use the remaining later. In conclusion strategy can be beneficial but receiving advice beforehand is paramount.

If you would like learn more on what you may be able to do and where to buy, please don’t hesitate to contact us.

www.crestproperty.net.au

While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.

Jun 2019