Looking to purchase your second property? Then it’s worth learning how to calculate equity for property, as it can help to avoid years of saving for a deposit.
If you’re already the proud owner of one property, it’s usually only a matter of time before your attention turns towards obtaining another. However, from the lack of brunches to the hardcore budgeting, it’s rare to have fond memories of the savings process linked to the sizeable deposit required for a property purchase.
Thankfully, the process of purchasing a second property is often quite different when compared to the arduous path of a first home buyer. If you don’t have a firm understanding on how the world of real estate finance works for budding investors, then your first port of call should be learning how to calculate equity.
Understanding The Concept Of Equity
For a small word, equity sure can pack a punch in the world of property. If you’ve been quietly paying down your mortgage, or your home has increased in value, you’ve probably built up some equity – but what’s the big deal?
Depending on your personal circumstances, unlocking the equity in your abode could allow you to upgrade, make improvements to your home or even invest in a new property. In simple terms, equity is the difference between your home’s value and your loan amount, or the funds that you have already paid back to the bank including your deposit. To calculate your equity, it’s as simple as minusing the outstanding amount owed on your home loan from the estimated value of your property.
However, accessing your equity is not as simple as strolling into the bank and asking for the funds you’ve already paid back. All lending providers have a wide range of different terms and conditions in regards to how and when you can access your equity, with some offering access to it after as little as six to twelve months. Other factors that may influence using your equity can include:
- The type of property purchased
- The policies of your lender
- Your servicing position with the bank
- Your age and income status
- Your repayment history and credit file status
- Ideally owing under 80% of your existing property value
It’s also important to understand that your total equity isn’t necessarily all available for you to use. A lender calculates usable equity as 80% of the value of the property minus the loan balance, so it’s important to factor this key figure in when learning how to calculate equity for property.
As an example, your home may be valued at $800, 000 with a mortgage value of $440, 000. Your lender will calculate 80% of the value of the property – so 80% of $800,000 is $640,000. This means your usable equity would be calculated as $640, 000 (80% property value) minus $440,000 (loan size) = $200, 000. You may be able to use this amount in the form of a home loan increase or line of credit secured against your usable equity.
In addition, another factor that lenders usually take into account is the borrower’s ability to service the loan. Even if you technically have a certain amount of usable equity, if your income, expenses and total liabilities don’t allow you to comfortably repay the full loan amount, then you may be able to only unlock the amount that you can afford, rather than the full amount of equity.
When learning how to calculate equity, it’s also worth noting that this figure can always be tweaked. The most obvious one is paying down your mortgage with additional repayments, which reduces the amount you owe on your loan while increasing the portion of the property that you actually own.
However, homeowners can also boost their equity by lifting the value of their property. This can be through renovations, extensions or cosmetic improvements, and yes – you can use existing equity to further increase equity.
Using equity to fund any kind of large scale purchase should involve careful research. As a homeowner, you still need to factor in things like bank fees, stamp duty, conveyancing and even the costs associated with refinancing. As a result, it’s always worth consulting with a mortgage broker as a means to ensure that you’re still getting a loan product that’s best suited to you, and your individual needs and personal circumstances.
Partnering With The Home Loan Professionals
Navigating the complex world of home loans has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on sourcing how mortgages work, then the good news is that it doesn’t have to be.
Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.
If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.