Available Equity Question

Hi all,

Maybe someone can help me get my head around this - but I am a little confused around my equity.

Currently, we have a property in Melbourne worth $825,000 (bank valuation) - which we owe $500,000. Available equity will then be 80% of $825k subtract $500k - which then leaves me with $160k of available equity.

We are looking to purchase 2 x properties this year with 10% deposit for each to maximise the number of properties we can purchase with our existing equity of $160k.

Property 1:
Purchase Price Aim= $360k
10% deposit= $36k
90% loan= $324k
6% buying cost (stamp duty plus extras)= $21.6k
1.9% LMI= $6.84k

This means from our $160k available equity in our home, we can pay the 10% deposit ($36k), 6% buying cost ($21.6k) and 1.9% LMI ($6.84k) from there which then leaves us with a remaining available equity of $95.6k.

At this same time, now our $500k loan for our home has become a $564.44k loan.

Then we purchase our Property 2:

Purchase Price Aim: $460k
10% deposit= $46k
90% loan= $414k
6% buying cost=$27.6k
1.9% LMI = $8.74k

This means from our remaining $95.6k equity in our home, we will have remaining $13.26k after spending $82.34k (10% deposit + 6% buying + 1.9% LMI).

At the same time, now our $564.44k loan has become $646.78k loan which still brings us under 80% LVR on our $825k home.

So now in summary, by the end of this year we should be in the following position:

Home worth $825k with $646.78k loan (LVR 78%)
Invest Prop 1 worth $360k with $324k loan (LVR 90%)
Invest Prop 2 worth $460k with $414k loan (LVR 90%)
Remaining Available Equity is $13.26k

Does the above calculation seem correct???

Then what confuses me is the following year in 2018, assuming all properties experienced a 3% capital growth, I calculate that my available equity reduces to a negative as shown below:

Home is now worth $849.75k (3% increase) with $646.78 loan, which means there is an available equity of $33.02k

Invest Prop 1 is now worth $370.8k with $324k loan, which means there is a NEGATIVE $27.36k equity.

Investment Prop 2 is now worth $473.8k with $414k loan, which means there is a NEGATIVE $34.96k equity.

If I sum the 3 x available equities above, I get that I now have a negative available equity balance of -$29.3k.

My question is why has my available equity become not only smaller than the previous year, but negative. Should I have taken the negative available equities as zeros - thus making my available equity next year $33.02k?

Haha Might be a real basic stupid question but it sure has me stumped at the moment of which is the correct way of calculating!!!

Any feedback would be truely appreciated!

KK

 

There are purchase costs of about 5% so it will take a while

 

Hello there,

Yes I've considered the purchase costs to be 6% in all cases... So is the negative available equity correct or do I just ignore the negative ones and call them 'no available equity' on the investment properties and only take into consideration the $33k positive equity on our home...

 

You are calculating your available equity assuming a 80% LVR loan but you are assuming you buy the two IPs with 90% LVR loans. There won't be any available equity (assuming 80% LVR) in the IPs until they have grown in value to componesate for the 90% loan as well as purchase costs.

Regards,

Jason

 

Hi Jason,

So yes, based on the fact that my two investment properties wont have any available equity next year, i basically only have the $33k available equity from my home is how Im understanding it. Correct?

And in actual fact, as I have already paid LMI for the two investment properties, when I calculate my available equoty on these two I should actually only multiply by 0.9 then subtract the loan amount rather than 0.8 I think...

 

Which then (0.9 x $370k) - $324k = $9k available equity?

 

Baabo87,

A question for your lender/broker - will the bank do cash out back up to 90% LMI? I wouldn't have thought that any banks would be too keen but something to check. When I calculate "available" equity I assume I can do cashout up to 80% LVR.

Regards,

Jason