HOME EQUITY IS THE DIFFERENCE BETWEEN YOUR PROPERTY’S REAL MARKET VALUE AND THE BALANCE OF WHAT YOU OWE TO THE BANK ON YOUR MORTGAGE.
- My house’s market value is: $400,000
- The balance I owe the bank on my mortgage is: $250,000
- Therefore my equity is: $150,000
For the purposes of new lending against existing equity in my home, a bank will allow me to borrow up to 80 percent of the home’s value. So in the example above:
- Home’s value is $400,000
- Maximum LVR (without lender’s mortgage insurance) is 80% x $400,000 = $320,000
- Less the existing $250,000 debt against my home - $320,000 - $250,000 = $70,000
To increase the amount I am able to borrow against my equity I can pay a lender’s mortgage insurance (LMI) premium and borrow up to 90 percent (and in some cases 95 percent) of the value of my home. If I did that and I borrowed 90 percent the figures would look like this:
- Home’s value is $400,000
- 90% LVR (incl. lender’s mortgage insurance) is 90% x $400,000 = $360,000
- Less the existing $250,000 debt against my home - $360,000 - $250,000 = $110,000
LMI is tax deductible and is often used by property investors to allow them to control more assets (buy more investment property) than they would otherwise have sufficient deposits for.
Of course in the examples above it is assumed that borrowing money to buy investment property is the right strategy for you and that you qualify with the lenders in terms of your ability to service any investment property loans you have. Debt is like a scalpel. In the hands of a surgeon it can be a vital tool to save a life. In the same way, the proper and responsible use of debt has allowed many property investors to create great wealth. But, as with the scalpel, debt can do much harm if it is not treated with respect and handled responsibly. Again it needs to be emphasised that while the results of building a successful investment property portfolio are something to get excited about, you’d be better off doing nothing and hoping for a pension than going about it the wrong way and unintentionally taking two steps backwards.
What was written above is worth repeating:
- Plan out your property investment strategy
- Calculate your expenses and income
- Ensure you get the right finance
- Ensure you have your investment finances structured correctly
- Buy the right property in the right area
- Be guided by professionals who know rather than become one yourself on the back end of years of expensive mistakes and avoidable opportunity costs
- Treat everything you do around building and growing your investment property portfolio as a business - because it actually is.
If you have any other questions regarding equity, your home's value, LVR's or more, please contact one of our property specialists on: 1300 883 854 or contact us