Equity is the difference between the market value of your property and the amount you still owe on your home loan. You can often access this equity and use it to improve your life style or use it towards investments.
If you’ve paid down your loan or your home has increased in value, you may be able to use your equity.
Let’s say that the property is worth $600,000 and you have a $300,000 mortgage on that property. There would be $300,000 that you don’t owe on that property that exists in value. Hence you have an equity of $300,000.
However, you can’t necessarily access the entire $300,000 in equity. The bank will generally only loan up to 80% of the value of the property if you want to avoid lenders mortgage insurance. So with our $600,000 property we would only be able to borrow up to $480,000 if we want to maintain that 80% loan to value ratio. We would have $300,000 in equity but we would have $180,000 in available equity which we could use to purchase another investment property.
The easiest way to know how much equity you have in your property is to get a valuation done. A lot of lenders—in fact most lenders—will only allow valuations to be done once every 12 months. However, there are some lenders that will allow it in a shorter time period. Hopefully the valuation comes back higher than what you purchased the property for.
Also make sure you have a plan and a budget in place, just because you have equity available doesn’t mean you should access it and invest. So always do the figures. Look at the cash flow and the projections of the property. Look at how it’s going to perform. And work out whether or not this is going to work for you and whether or not you can afford it.
To understand cash flow, your new borrowing capacity and other expenses related to buying an investment property, call Vinay on 0487 344 352. He's more than happy to help.