hi, this could be a stupid question.
if a property, has gone up in value by say, 120k, i take it i can use that equity as a deposit on another place.
what happens if the property market goes down and that 120k equity drops to 50k?
does that affect the other property loan etc?
Hiya
Yep – if the property has gone up in value, it’s possible to extract equity to use as the deposit on another property subject to the lenders policy.
If the property goes down in value, you won’t be able to extract equity. There’s usually no implications for the loan – especially if the valuation was ordered upfront and not part of a loan application.
Cheers
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]
I am all very new to this and curious on this myself but can i just confirm is what you mean is if your home is valued at 500k and your loan is 380k then you have 120k equity in your home.
Then you go and take out that equity and use lets say use all of it for a deposit so there is now zero equity in your current property and let us say 90k in your investment property (- 30k for stamps). The market then falls over and your properties drop 100k in value and you are now on -10k equity.
Is this what you are asking? Or am i way off the mark?
If it is then i am no expert but my understanding is this would then affect your ability to borrow any further money from the banks and hence not be able to buy any other property until that equity returns.
if a property, has gone up in value by say, 120k, i take it i can use that equity as a deposit on another place.
Let’s not complicate this. You can borrow safely upto 80% of your property value.
>81% and over will incur Lenders Mortgage Insurance. Some banks allow 90% but again you pay LMI on that 10%.
i.e. Your house is now worth $500,000 and your debt is $300,000.
$500,000 x 0.8 = $400,000 minus your debt leaves you with $100,000 of equity to use safely.
Hope this helps.
L_S
thanks for the replies, question answered!
It doesn’t work like a margin loan in the world of shares. That whole business about the bank ringing you to say you need to “top up” the difference the portfolio has lost. You know, just magically fashion a spare $50k out of thin air over night. Scary.
If you had used equity to fund the deposit of a second property, if the property/s went down in value, your bank doesn’t ring you and demand you “top up” the difference. You just need to sit quietly and let time resolve the issue. ie Wait for the value to return to where it was at, or knock the mortgage down a bit with your spare income.
With that said, you could find it very hard to refinance to a different lender. (A new lender would value the place and say yeah happy to lend on it, at x%, so how are you going to fund the difference? That spare pile of money under the mattress perhaps?) So you would probably have to stay put with your original lender till the value went up and/or you paid some debt down. Another point to remember is that if a property went down in value and you had to sell it during that unfortunate time, you would be staring down the barrel of losing money if the sale proceeds were insufficient to pay out the debt to the lender. It is for this reason that lenders might prefer a lower LVR. It reduces their risk to lend you only 80% of a property’s value rather than 95%, because then if the value dips a bit and the property needs to be sold during that time, they are still likely to get their money back from the sale of the property.
Hope this helps?
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
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