I have a question about borrowing on equity. I have an investment property worth conservatively 320,000. I owe 170,000 leaving around $150000 equity. My question: Is the equity the total i can borrow for another investment property? Or, is that how much i can put down as a deposit on an investment property?
Hi Booge,
Not a broker so information only.
Based on numbers provided your equity is $150,000 – but not all of this is available from a lending perspective.
Available equity is a different kettle of fish entirely and the formula to calculate what is available to you is
Value of property X lending ratio – existing debt = available equity for further investing.
Assume the bank was happy to lend you 80% of the value of the property the calculation is.
$320K X 80% – $170K = $86K
If you can go to 90% the figures change enormously
$320K X 90% – $170K = $118K
If it is possible to go to 95% available equity increases again..
$320K X 95% – $170K = $134K
N.B. In the last two calculations you will lose some of your available equity to Lenders Mortgage Insurance.
As a real rough calaculation assume around 2% of total borrowings. At 90% lend LMI payable would be in the very rough vicinity of $5800 – the actual figure will vary depending upon a range of factors.
Depending upon your circumstances the equity available and released can be used as deposits for other property. How much you can borrow will be determined by the bank after they consider your security and income position.
Looking at you figures your security position looks pretty good – don't know about income.
Income around 75K, looking at rural investment properties in Victoria. Seem fairly good investments from what I’ve found so far. Many good houses for around the $200K mark which is what sparked my interest in the equity question.
Hi Booge,
Being rural – it is possible the banks may only lend to a maximum of 80% of the new purchase. Some postcodes and zonings are considered a greater lending risk and therefore banks will cap their exposure to any one property.
The location of your existign property will also impact on your capacity to leverage beyond 80%.
Hi Booge
Actual equity and useable equity are 2 totally different things and as Derek has well pointed you are going to be limited on what you can access.
With a client looking to do exactly what you mentioned i always prefer to work backwards and assume that if you are seeking to purchase a property of say $200,000 and a maximum loan of say 90% then what would we require.
In this case and with making a couple of assumption we will assume you need $20,000 which represent the 10% and a further $10,000 which represent the acqusition costs.
If we assume that your current property is valued at $320,000 and the acessible equity is 80% of this figure less the existing liability i.e $320K x 80% = $256,000 less existing loan of $170,000 = $86,000 .
As you only require $30,000 to cover the total amount for the investment purchase this means structured correctly you could buy another IP at similar price and still have a decent cash buffer.Most important part is how you put it together and structure the loans separately without cross collateralising the securities is the main thing to enable you to grow with your portfolio and not only when the Bank feeling lending.
A good independant mortgage broker should be able to assist you in setting up the loans and structures.
Any other questions post away.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
No need to apologise for sounding dumb… forums are there to help people share ideas and knowledge… and hopefully to help you gather enough knowledge to decide on a vague strategy before you start paying people to help you execute the said strategy
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
No need to apologise for sounding dumb… forums are there to help people share ideas and knowledge… and hopefully to help you gather enough knowledge to decide on a vague strategy before you start paying people to help you execute the said strategy
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
So based on the amounts in the scenario above re equity amount and IP price, what would the loan amount be on the $200K property?
Hi Booge,
If you are borroing at 70% then the loan will be $140K. You will need a funds to complete of $70K being $60K deposit and $10K costs.
If you are purchasing the property with an 80% lend your loan will be 80% of $200K = $160K. Funds to complete of $40K deposit and approximately $10K costs will be required.
If you are borrowing at 90% your loan will be $180K. You will require funds to complete of $20K (deposit) + $10K costs (approx) and a further $3.6K (LMI approximate based on rough 2% LMI fee)
If you are borrowing at 95% then your loan will be $190K. You will need funds to complete of $10K deposit, a further $10K for costs and $4K (LMI at 2% of borrowings)
Please note LMI fee will vary to that shown above – I only use 2% as an indicative figure. As your total borrowings and LVRs rise then your LMI premium also increases.
As you access and used up your home equity, naturally, your mortgage payment will also rise, unless you turned your home from PPOR into IP, nothing you can claim from the tax man hence choose your strategy wisely (e.g., positive geared cash flow or positive cashflow or negative geared), because it could affect your cashflow….investment is all about cash flow from my perspective anyway.
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