Hoping someone can help me with a pretty basic question as to how banks work out equity.
I dropped into my bank today with what I thought was a pretty straight forward couple of questions but couldn't get any answers.
I am considering starting a business/invest in shares or buy an investment property and wanted to get an idea as to how I could use my equity to help me finance this.
At the moment I own a property I bought for $385k in 2007.
Existing mortgage is about $345k.
Other similar properties in my suburb are selling for about $460 – $590k as recently as last month.
Much of my decision will be based on what the bank is prepared to lend me, but from my understanding they wont value my home unless I have committed to the loan. I wont commit to the loan until I know how much they are prepared to lend me. Sounds like a catch 22.
Any advice as to how others go about this process and any tricks as to how to deal with the bank would be much appreciated.
Cheers
Hi 250k
Hmmm…..sounds like the bank is being a little difficult. I had a client in a similar situation recently. He went to his lender to access some equity and they pretty much told him that unless he was going to finance the next property through them, they weren't interested in valuing his current property.
Depending on your lender you may be able to "top-up" your current loan to 90% of the properties value – giving you access to around $70k (based on the lower end of your estimated property value). It is likely you'll have to pay some mortgage insurance. If you'd prefer to avoid mortgage insurance – you could opt for an 80% top-up but that would give you access to only $23k.
We are operating in a new lending environment at present – that may be a reason as to why the lender is reluctant to provide the "top-up" at the moment.
In any case, an independent mortgage broker that knows the ropes should be able to sort it out for you. If your current lender won't help you out they should be able to place you with one that will.
Hope that helps.
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
250k – can you let us know your bank?
In some cases there are reasons behind this
e.g.
1. If you have a good customer rating they may not need to value the property (your estimate may be OK)
2. Some don’t charge valuation fees and do not have the ability to charge them via the branch. Because they are wearing the cost they only order the valuation once they have completed an assessment and determined if a valuation is required (assessment for existing client can be done in as little as 15 mins – subject to lender)
3. Some let you order you own val (you can order your own with CBA on their website for $99 without applying) – it comes back to you not the bank – the bank just need the reference no when you apply.Unless you got offered an amazing deal it is generally not worth moving banks once exit fees, discharge of mortgage fee (bank), discharge of mortgage fee (titles office), new establishment fees, new mortgage registration fees etc are all added.
If you can let me know the bank I might be able to give more info.
To give you an Idea of how to calculate Equity, You will need to know the current marketable value of your home,
You will need to know the balances of all of your mortgages and any lines of credit that use your home as collateral (known typically as Home Equity Lines of Credit).
Because of the sub-prime mortgage crisis of 2008, most banks stay within 80% of your total equity (or “loan-to-value” ratio). They will “loan” you 80% of your home’s “value”. Depending on the banks risk tolerance and your credit, they could raise it to 90%, but you may have a higher interest rate.Let’s say your home’s market value is $350,000. You owe $125,000 on your first mortgage and do not have a second mortgage or any lines of credit attached to your home. You do want to get a Home Equity Line of Credit, and your bank will lend you up to 80% loan-to-value.
Equation: $350,000-$125,000=$225,000 the amount of equity in your home.
Maximum line of credit from your bank: $225,000 X 80%=$180,000.This is the maximum the bank will loan in this scenario, solely based on the home’s value.
Sorry appreciate Sebastian is new to the forum but his information is incorrect.
Most lenders will go to 90% of the property value and will not charge you a higher rate
Richard Taylor | Australia's leading private lender
Sebastian Shauw wrote:Equation: $350,000-$125,000=$225,000 the amount of equity in your home.
Maximum line of credit from your bank: $225,000 X 80%=$180,000.This is the maximum the bank will loan in this scenario, solely based on the home’s value.
In addition to Richards comments the above calc is incorrect.
Home loan of 125k plus line of credit of 180k would mean total debt of 305k.
305 / 350 = 87% LVR.
To work out your availabe equity mutiply your property value by desired LVR.
E.g. 350 X 80% LVR = $280,000.
Then subtract any existing debt.
280k less home loan of 125k = 155k available
Something tells me that lending criteria/policy and the way equity is calculated is probably a little different in South Africa.
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi ,
well & good but the actual amount of " top up / line of equity "you will be allowed to get from your bank will depend on your Income and serviceability of the amount of loan at either 80% or 90 % of total Value
( but at 90% you will be up for mtg insurance + fees and charges etc )Simple formula you could use based on the information supplied and lets asume the Banks Valuation of your home is pretty much in line with current market values @ $580k
( EXAMPLE ONLY )
Current value of you home – $580,000 – Less 20 % ( or 80% of valuation )
= $464,000
Existing mtg owing – $345,000
Amount of Equity Available = $101,000 ( Figure would be slightly higher @ 90% of valuation + mtg Insurance)
The bank will only loan this amount of equity to you if you can afford the extra repayments on it
Actual anount the bank will loan in equity will be based on your current income and other monthly expenditure like car loans, living expences, school fees, child maintence, credit card bills , insurances , council rates etc etc .
Cheers
Eyekew
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