What is equity?

equityYour home equity is the difference between your property’s market value and the balance of your mortgage. If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable equity and this can be a valuable resource when it comes to property investment.

Our friends at InFront Home Loans can help you to find out how much equity you have in your home and how you might be able to use it to buy an investment property sooner.

Example of how home equity can help

Here’s how it works. Let’s say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements a lender will fund 80% of the property’s market value – potentially more if you’re prepared to pay Lenders Mortgage Insurance (LMI). That is the bank will lend you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit and other upfront expenses. This can come from the equity in your existing home.

Let’s say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

As an investor you can access up to 80% of your home equity (without the need to take out LMI), which equates to $160,000 in this example. Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property you can take this from the $160,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders will lend up to 95% of the property value less the existing mortgage where LMI would be paid on the amount borrowed over 80%.

If you think you might have equity in your home please contact us and we will put you in touch with one of the friendly team at InFront Home Loans and he can help you to work out how much equity you have in your property and how it can be accessed to fund your investment.

Acknowledgement: This article was published by Mortgage Choice