What is available equity?
Understanding property finance đ4
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, itâs important to grasp the meaning of âavailable equityâ. 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 wonât lend you 100% of a propertyâs 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 propertyâs 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 â paying off the loan, agentâs 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 â thatâs $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 youâre 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%, youâll incur the costs of Lenderâs 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 youâll make. The only real challenge here is cash flow.
Next up the fifth property finance insight.
Stay tuned for more daily insights from Wealth Through Property.
~Daimien Patterson
JOIN OUR WEBINAR HERE
GET THE BOOK HERE