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

Accessing Equity

A step by step approach

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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


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 propertyYou 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 howeverThere 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


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.


Using equity

$200k

$300k

$140k available

$20k forReno fromoriginal$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

$360kPotentialadded value

Use $100kincluding costs


How this is replicated

$200k

80% $160k

80%is $240k

$300k

$100k

$140k

$300k

$60k

$20kreno

$360k

80% of $360kis $288k. Hence minusthe originalloan of $240kshows new equityIs $48k

$48k

$300k

$60k

Hence do itAgain with funds remaining from first line of credit and new available equity

$40k still available


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.

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


Documents

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