Equity required to buy a second home

Discussion in 'Property Finance' started by Bean27, 8th Jan, 2019.

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  1. Bean27

    Bean27 Well-Known Member

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    Hi Guys

    I am pretty new to real estate but I feel I have learnt a fair bit in a short time, I purchased my first home in May for 240 k. I live in Devonport Tasmania where the median house price is now 260. We have done a lot of renovations so far and with a slight market increase we have an estimated equity amount of 60 k. My question is what would a good amount of equity be to buy our second home as an investment property? My goal would be to continue to renovate and be in an equity position of 100 k by 2023ish.

    Thank You
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    at least 15% of the new purchase price would be needed as usuable equity (90% of actual equity).
     
  3. Bean27

    Bean27 Well-Known Member

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    Thank you that is great to know. So hypothetically speaking right now I have 54 k of usable equity at the moment and could buy something around 300 k to invest in. I guess the key is to have the LTVR under 80 % though.
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    that would depend on goals and access to higher LVR finance.......

    some peops even want 95 and can get it

    ta
    rolf
     
  5. Bean27

    Bean27 Well-Known Member

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    Yeah OK, I guess its a fine balance, at 95 % the repayments would be very high so not ideal if you can't find a tenant
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Generally speaking you can borrow up to 80% of the existing property for equity release purposes. The equity you have available is the difference between that and what you currently owe.

    Equity available = (Current value of the property x 80%) - Amount owing

    You haven't mentioned what the loan on your existing property is, but you should be able to plug the figures into this equation fairly easily. Reverse engineering this equation, if you've got $54k usable equity, then your existing loan would be $154k.


    Again in general terms, the available equity plus any savings and other funds you can contribute needs to cover:
    * 10% deposit
    * 5% for stamp duties and purchase costs (5% is rough but tends to work well).
    * 2% for LMI

    You need roughly 17% of the price of the proposed purchase.
     
  7. Bean27

    Bean27 Well-Known Member

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    I am pretty sure its 54. We brought the property for 240, market value has gone up 10 k since plus we have added a new kitchen plus new flooring throughout the whole house. So guessing 270 value. We owe 209 k so 61 k equity - 20 % is 54. Not sure if that math is right?

    Cheers
     
  8. TAJ

    TAJ Well-Known Member

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    Will you be in a position financially to service a second loan under the new lending criteria?
    Many people are facing this dilemma at the moment.
     
  9. Bean27

    Bean27 Well-Known Member

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    What is the rundown on new lending criteria? We could afford it no worries if tenanted, if not tenanted maybe only 2-3 months, but demand is high. I guess this is the challenge everyone will face at some point
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Your math is incorrect. You can borrow 80% of the property value in total, then you need to subtract the amount you currently owe. It's not 80% of the difference between the value and what you owe.

    $270k x 80% - $209 = $7k

    You've got $7k usable equity.
     
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  11. Bean27

    Bean27 Well-Known Member

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    Oh dear that's not great, thanks for the info. 7 k to 50 k is a long way if I want to get a second home valued 250 k
     
  12. TAJ

    TAJ Well-Known Member

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    Don't take offence, but you have a lot to learn.
    This forum is a great resource to do that.

    Keep reading!
     
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  13. Bean27

    Bean27 Well-Known Member

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    Thanks, that is why I am here :) not offended. cheers
     
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  14. Bean27

    Bean27 Well-Known Member

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    So it could take years to buy a second property with just equity so a cash deposit plus equity is much better?
     
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  15. TAJ

    TAJ Well-Known Member

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    Building equity in a falling market is nigh on impossible. So yes, building up savings to couple with a possible equity release would be advantageous.
    Don't be in too much of a hurry. Financial education along with patience will serve you well if you wish to become a successful investor.
    Rome wasn't built in a day.....
     
  16. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    How quickly will the property grow in value?

    Honestly I don't think there's much more growth in the Tasmanian market. Perhaps another year of growth, but it is going to stagnate and is likely to not do much for an extended period after that.
     
  17. Bean27

    Bean27 Well-Known Member

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    There seems to be a lot of population growth down here by the naked eye and housing shortages. Would that not put the property values up?
     
  18. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    True, but Tasmania also has the highest unemployment and lowest education levels in the country (granted NT might contend that statement). Combine this with tightening credit and it's clear that the increases won't continue indefinitely.

    If you look historically there's a market cycle of 2-3 years of boom with massive increases, then about 10+ years of stagnation before the next boom and the cycle begins again. The boom in Hobart tends to come on the tail end of the Melbourne and Sydney booms as these locations become unaffordable.

    Hobart began booming about 2 years ago, has increased significantly since then and is now becoming unaffordable. It started right about when Melbourne started becoming unaffordable. I've observed this cycle twice previously. You can do very well in Hobart if you time the market right, but buying at the top of the cycle will leave you in limbo for a very long time.

    I think there is still some growth in Hobart due to the high population growth, but probably only another 12 months and 10%-15%. Beyond that I expect the market to go flat for a very long time, possibly with a mild correction. You can probably grow some equity in your existing property, but I'd look elsewhere for the next purchase.
     
  19. jazzsidana

    jazzsidana Mortgage Brokers - Investment Savvy Business Member

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    LVR - Avoid where you can and embrace when need be..

    If all other things add-up (cashflow, serviceability, e.t.c e.t.c), time to strike and i'll sure avoid Tasi along with some other states!.
     
  20. Bean27

    Bean27 Well-Known Member

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    thanks for the information, the problem living in tassie and trying to buy elsewhere is having a big enough deposit. Our house is worth probably 270 and the same house in Hobart is probably 500 plus