What is available equity?
Understanding property finance 👉4
If you missed the last 3 property finance insights, I suggest you go back and read them as understanding property finance is vital to property investment success!
Once you understand the concept of equity, it’s important to grasp the meaning of “available equity”. Available equity is how much money you can borrow against a property and is determined by the difference between the LVR limit and the amount of the loan. You can look at it as the percentage you own versus the percentage that has debt owed against a property.
Since the bank won’t lend you 100% of a property’s value, they want to keep a percentage of the property value against which to secure the loan. This is where the LVR limit comes into play. The difference between the property’s value and the LVR limit is what we call security. The bank holds onto this money in case of a foreclosure to cover all the costs associated with the sale of the property – paying off the loan, agent’s commission, auction fees, advertising and administrative costs.
For example, if you have a property worth $500,000 with an LVR limit of 90%, you can have a loan up to 90% of the property value – that’s $450,000 with a minimum equity of $50,000 left behind. If you have a current loan of $200,000, that means you have equity of $300,000. Subtract your $50,000 minimum equity and you’re left with $250,000 of available equity.
Calculating available equity for a property
Knowing how much available equity you have is very important since you can essentially borrow that money and use it towards buying more properties without using your own cash. Remember that if your LVR is over 80%, you’ll incur the costs of Lender’s Mortgage Insurance.
This often scares most people off, but the additional borrowing capacity and the extra capital growth you can gain make it all worthwhile. The more properties you have, the more money you’ll make. The only real challenge here is cash flow.
Next up the fifth property finance insight.
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