Are you keen on getting a property investment, but are not quite sure if you have the funds to do it?
One of the fundamental principles that many people overlook when they’re looking to invest in property is the amount of equity that they already have available to them to draw upon. Ignore this and you could be sitting on a treasure chest and simply not know where the key is.
As a buyer’s agent, I see this happen often with new clients.
Many of them are time-poor, working parents who are looking to build a healthy retirement for themselves or to pass something on to the children.
While not all of them have a great asset base to start with, many of them were smart enough to have bought a family home early on and now that home has a considerable amount of equity in it that they can now invest into property.
So how much equity can actually be accessed from our existing property?
We’re going to use the example of buying a property at $500,000.
Assuming we borrowed at 80% at interest-only, the loan would be $400,000 and our deposit would be $100,000.
Now let’s say over the next 10 years, that property doubles in value to a $1,000,000. We haven’t paid anything down on the loan so the balance remains at $400,000.
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So how much equity is actually available in this property to be able to draw down on for another purchase?
Provided we can service the new loan, and we look at borrowing 80% again, the value of the loan would come to $800,000.
In this case, though we still have a $400,000 loan, so we need to take that amount off the potential equity as it’s currently still owing to the bank.
The remaining amount ($800,000 less $400,000) is $400,000. Provided you can service the loan on this new amount, this is the level that the bank will allow you to draw down from equity.
So to do the exercise yourself, take your 80 or 90% lend on today’s property value, take away the amount you already owe from the original loan, and provided you can service the loan, that’s potentially the amount of equity that you can access.
Now you can take that equity and use it as a deposit for another loan, provided you can service it all, which is a great way to start building a property portfolio without taking any money out of your own pocket!