Is extraction of equity tied to LVR

Hello,

I have never extracted equity and google-fu only gives basic info. So, if one has to extract equity from an investment property, how does this work ? Is the equity extract-able only if the original LVR was at 80% ?
Or is it equally easier to extract equity from IPs with 90% LVRs ?
Are there thumb rules around equity extraction ?

Cheers,

 

Hi @aussieB

A lender is generally not keen to release equity if your current loan plus equity release would result in a total overall LVR of more than 80%. Some may do 90%.

 

You are not really extracting equity but borrowing money.

Assume the lender will only lend 80% or 90% of the value of the security.

So your maximum 'extraction' would be
90% of property value less existing loans

 

Say a property was valued at 100k, at 80% LVR, the current loan is at $80k. The next morning property is valued at 160k. So loan amount is at 80k and equity at 80k.
In this case, to maintain 80% overall LVR, 80% of 80k can be extracted. Correct ?

 

no, 160 @ 80% is 128, less existing loan of 80, means there is 48 'borrow able' equity available.

the trick is borrowable equity, and equity. equity is the value less the loan amount. borrowable equity is the value times % (80/90%) less the existing loan.

 

In terms of LVR, it will depend on lender as they all have their own rules. In general, over 80% you'll need strong servicing and the right lender to make it work.

 

Right. So if the original loan had no LMI and the lender allows borrow able equity to go up to 90%, LMI will need to be paid ? My understanding is if the original loan and borrow able equity remain at 80% there is no LMI, but how does it work if the original loan was at 90% with LMI.
Does keeping overall LVR after extracting equity at 90% incur any further LMI ?

 

If you borrow over 80% LMI will generally be payable.

 

You should also know its subject to servicing. Say I have a $600k property with a $100k loan. At 80% I have $380k of borrowable equity. But a lender won't give me a $380k loan unless I can service it. They might only lend me $300k if that's all I can service.

 

Great question @aussieB! Tapping into equity for further purchases is often talked about but I rarely see detailed discussion about how it's actually done.

If I can expand on this question and ask about the mechanics of the process. Is the usual course of action to simply increase the loan with the existing lender of the property which has the equity being used? If so, how do you then use these additional loan proceeds to fund the next purchase? How does the extraction actually work? And what if you are drawing on equity from a number of existing properties, not just one?

 

For the way to do it see
Terryw’s Ideal Loan Structure
Terryw’s Ideal Loan Structure https://propertychat.com.au/community/threads/terryws-ideal-loan-structure.6016/

 

No. You either apply for a new loan or a new 'split'

Just like any regular loan, generally the bank writes a cheque that is presented at settlement

Just as above. A cheque for each loan. You can do as many as you need. It really is straight forward.

 

Seems like this point hasn't been answered and it is an interesting one so here goes:

If you paid, for example, $10k LMI on your original loan (say 88% LVR) and would now like to top up with the same lender to, say, again 88%, which should be say $15k, you will need to pay only the difference of the LMI = 5k.

This is perhaps the main reason to top up with an existing lender (another very good reason may be having a fixed loan) and not refinance with another, as in the latter case you lose the benefit of the LMI you paid (no refunds, thank you very much!).

Hope this helps?

Cheers,
Ethan

 

The following article seems to explain the process itself well and describes the different options - YIP mobile

It mentions the change of loan purposes issue that you referred to Rolf.

When people refer to a split, is this the same thing as a second loan account?

 

Spot on

Cheers

Jamie