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© 2009 Investors Choice Mortgages Accessing Equity
©2009 Investors Choice Mortgages Accessing Equity There is often confusion on how to tap into the equity that you have grown in your home or investment property This brief presentation shows a general example on one way this can be done Disclaimer: No investment decision should be made solely on the information provided and you should always obtain independent financial and legal advice in respect to your specific requirements
©2009 Investors Choice Mortgages Step 1 Let us assume you bought a property years ago for $200,000 with a 80% loan ie you put in a 20% deposit. Hence the loan to value ratio LVR is 80% This means you took out a $160,000 loan. Generally if this loan is over your Principal Place of Residence (PPOR) then this would be a principal and interest loan and you would have a redraw that allowed you to put extra money into the loan and draw it out when you needed it. Now years later the loan has been paid down due to your extra repayments and your redraw facility and you have a house that has grown in value to $300,000 but only with a $100,000 loan. As seen in the next diagram
©2009 Investors Choice Mortgages Step 1. $200k 80% $160k $300k $100k Original House has grown from $200,000 to $300,000 Original loan has been reduce from $160,000 ie LVR 80% to $100,000 ie 67% To calculate the new equity available in the property You need to decide how much equity will be left in the Property. For this example lets assume that the LVR will be returned to the 80%, ie not incurring lenders mortgage insurance. Therefore the available equity is calculated like this $300,000*0.8= $240,000 however There is still a $100,000 debt against the property so the equity available to use in this property is $240,000 - $100,000= $140,000
©2009 Investors Choice Mortgages Refinancing to access equity $200k 80% $160k $300k $100k $140k $300k 80% $240k Original $100k mortgage Additional mortgage is $140k Next: Refinance the whole loan with either a new lender or your current lender. This is a good time to get a mortgage professional to help compare a number of lenders products for you. If working with your current lender beware of cross collaterisation – they may just want to lend you 110% of the new property price. This results in your home and investment property acting as security for the investment loan.
©2009 Investors Choice Mortgages Using equity $200k $300k $140k available $20k for Reno from original $140k LOC $300k $60k 80% LVR Step 2. After you have refinanced, usually through a Line of Credit, (where you only pay for what you draw out like a big credit card), you then look at purchasing a property. Using the Line of Credit to provide a 20% deposit for the new property, eg assume it is worth $300k and a 20% deposit is $60,000. ( You could put down a lower deposit, ie %5 or 10% etc remember this would incur lenders mortgage insurance) Assume $20k for stamp duty and costs and $20k for a renovation hence you have spent $100k of the $140k available. NB. It is one thing showing examples about using equity to buy property but you will need to make sure you can service the loans to borrow the money or increase the mortgage on your original property $360k Potential added value Use $100k including costs
©2009 Investors Choice Mortgages How this is replicated $200k 80% $160k 80% is $240k $300k $100k $140k $300k $60k $20k reno $360k 80% of $360k is $288k. Hence minus the original loan of $240k shows new equity Is $48k $48k $300k $60k Hence do it Again with funds remaining from first line of credit and new available equity $40k still available
©2009 Investors Choice Mortgages Releasing Equity This brief summary shows one way how to release equity from your home to purchase an investment property. The biggest issue you will face is servicing this debt so that you can replicate this strategy or your particular strategy Once you can no longer service you can wait for capital growth to assist or look at some other innovative lending strategies. (May 2009 update) Please note some of the traditional ways of accessing equity ie Lines of Credits now hold some risk and alternative finance structures should be now considered. Please contact Investors Choice if you are considering accessing equity so we can discuss your options
Accessing Equity A step by step approach. Step 1 Let us assume you bought a property years ago for $200,000 with a 80% loan.
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