Equity is the difference between the market value of your property and the amount you still owe on your home loan. This equity is often accessed by investors to help finance an investment property, enabling an investment property purchase much sooner than if using savings alone.
Knowing the basics of how to calculate the equity in your home can help with planning for the purchase of an investment property, both in terms of the timing of when this purchase could be achieved and also in clarifying what you can afford.
Following are the basics of how to calculate the equity in your home and some points to consider when looking to access this equity. Of course, this article is intended as a guide only and you should discuss your individual circumstances with your accountant and/or financial advisor before taking any action.
How to calculate the equity in your home
The first point to consider is that you will need to get a property valuation on your home to be sure of the equity you can access. While you are be able to estimate the market value of your home, a lender may determine the value differently and it is the bank's property valuation which counts when calculating the equity you can actually access.
That said, you will likely have a feel for the market value of your home and this can be used as a starting point.
The next step is to deduct the amount you still owe on your mortgage from the value of your property. For example, if the value of your property is $500,000 and you have a mortgage remaining of $300,000, your equity is $200,000.
However, most lenders will only allow you to borrow up to 80% of the value of your home. This is often referred to as an 80% lending-to-value ratio or LVR. If you wish to borrow more than this, you will need to pay Lenders' Mortgage Insurance (LMI) which can be quite expensive and for this reason best avoided if at all possible.
Right, so how much equity can you access without paying Lenders' Mortgage Insurance? Following the numbers in our example, let's say:
Example equity calculation
This means you have $100,000 of equity in your home which you could use towards the purchase of an investment property.
Accessing home equity for investment - additional points to keep in mind
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