Our founder, Joseph Daoud, was featured in an article from 9 News and discussed how owners can have access to a secret weapon: equity.
“Equity can make a huge difference to a person’s life and financial outlook, as the more equity someone has, the more money they could potentially have access to,” says Joseph.
We’re going to assume our readers are familiar with the concept of equity, but a quick definition might help those who need a refresher.
Equity is the difference between a home’s current value and any debt still to be paid on the loan. For example, the property is valued at $1 million, your mortgage is $700,000, so that’s $300,000 in equity. Simple.
To try and access the equity, you basically are asking for another loan and taking on more debt, which means the lender will assess the risk once again.
“Using your equity is basically letting your LVR work for you,” says Joseph. “For example, if someone previously purchased a property for $500,000 and their loan was for $400,000, their LVR is 80%. It’s much harder to tap into this equity as you have to find a lender that will allow you to borrow over 80% without incurring lenders mortgage insurance (LMI).”
The higher the LVR, the more risk to the lender.
So how much equity can a property owner access?
Just because your property is worth a certain amount, it doesn’t mean that a lender will allow you to borrow the full amount of equity available.
“The reason lenders may not allow access to full amounts of equity is because they may see you as: 1. Unable to make the additional repayments and 2. Using the equity for something the bank does not see fit,” says Joseph. “For example, if you own a $500,000 property and it so happens to increase to $1.5 million, you may have been able to service the previous $400,000 loan, but you may not be able to service the additional amount that you’re looking to attain.”
Why you’re accessing the equity plays a role for lenders as they look unfavourably towards overdue credit card debt, a tax debt/liability, or things like luxury and designer items.
What big-ticket items can your equity be used for?
“You can tap into equity to purchase big-ticket items, such as another property or a vehicle or a boat,” says Joseph.
Here’s a list of what you can draw equity for:
- Renovations (both structural and cosmetic – large-scale structural projects will need a construction loan)
- Purchase of future investments (can be shares or another property)
- Purchase of a holiday home
- Purchase of a vehicle or boat
- Payment of a holiday or wedding
- To pay off short-term debt like car loans, personal loans, credit cards (as long as there are no dishonours), and HECS debt
If you are savvy enough, you could use equity to grow your property investment portfolio.
“You can tap into equity to attain your 20 percent deposit and be able to purchase more property in the future,” says Joseph.
“You can use the rental income to assist in paying off the mortgage, and if needed, you can use negative gearing to assist in offsetting tax. You can recycle this process the larger your portfolio becomes to be able to purchase more properties down the line.”
If you are interested in doing something like, ensure that you speak to a qualified broker.
“The role of your broker will be to ensure that you can continue to service these home loans while continuing to live your ideal lifestyle without breaking the bank,” says Daoud.
Get in touch with a broker today at It’s Simple Finance.