Equity is an important concept for homeowners and investors to understand, as it can be an extremely powerful tool in expanding your property portfolio and enhancing your financial position.
But what is equity? What is a property's market value? And how can you use them to your advantage?
Our team at loans.com.au are here to help answer these questions.
The equity in your home is the difference between the market value of the property and the remaining home loan balances, or the value of what you currently own in the home. This can be expressed as a dollar figure or as a percentage.
Say the market value of your home is $400,000, and you owe $200,000 left on your home loan, then your home equity is $200,000, or 50%. This is because you subtract the balance owing on the loan ($200,000) from the total property value ($400,000).
Your equity can either increase or decrease over time, due to both paying off more and more of the loan and the home’s actual market value changing. If that $400,000 home increases in value by 10% to $440,000, and you still owe $200,000, then the equity in your home is $240,000.
To calculate the equity in your property at any time, simply use the following formula:
Property value – loan amount = equity
LVR, or loan-to-value ratio, is a percentage that represents how much of the property's value you'll borrow, and is directly related to equity. Say if you’re taking out a home loan for a property worth $600,000, and have a $100,000 deposit, then you’re borrowing the remaining $500,000. That $100,000 equals about 17%. So in this instance, your LVR would be 83%, since you’re borrowing 83% of the property’s value.
To calculate LVR, use the following formula:
Loan amount/property value x100
In most cases, the lower the LVR the greater the chance of approval from a lender. Having an LVR of 80 or below means you can also avoid the high cost of Lenders Mortgage Insurance (LMI).
A property report is basically a report that includes extensive information about the property you're trying to buy, sell or even the property you own. The information inside includes:
The number of rooms (bedrooms, bathrooms)
The property type (townhouse, apartment etc.)
Other simple stuff (number of car spaces, living areas etc.)
The land size and type
The previous sales history
Other comparable sales in the area
Vacancy rates in the area
Suburb stats, such as crime rates
Other location highlights (supermarkets, cafes, schools, public transport etc.)
But all of this information really serves one purpose: To give you an estimate of how much a property is worth at this moment in time, aka its market value. As a homeowner or someone looking to buy a new property, this market value is extremely important to know.
Simply enter your property details on our property report page to request a free property report. These reports can be an invaluable tool in your quest to grow your property portfolio.
Once you get the report, you can use it to calculate your existing equity and LVR, based on the property’s market value.
Equity can be extremely beneficial as you can use your existing equity to get another home loan, also known as a home equity loan. This is when you use your equity to cover for the deposit on a new property, using your existing property as collateral. This is why it’s so important to enter the property market because once you’re in, using equity is generally much easier than saving for another deposit.
Using our example from earlier, let’s say you still have $200,000 in equity after getting an accurate market value. If you’re looking to buy another home and the lender requests an 80% LVR, that means you can use up to 80% of your equity as a deposit. In this case, that means you’d have up to $160,000 to use as a deposit. In many cases, $160,000 could be much more than a 20% deposit, meaning your LVR could be well below 80%.
Your equity can also be used to finance a new car, fund a home renovation, invest in the share market, or just to finance a major expense like a wedding or a holiday.
The bigger your equity, and the smaller your LVR, the more you can request to borrow.
If you’re ready to use your equity to buy another home, then book an appointment with one of our friendly lending specialists or check out the products we have on offer.
Our Smart Booster Home Loan is a low rate home loan which allows you to boost your savings, build your equity and own your own home, sooner.