Understanding how equity effects your loan

Lets say tim buys his first home for 250 k and in 10 years his loan amount is 140 and his property is worth 300. He has 100 k equity (300-20 %=240-140) he then uses that equity to buy another property. How does it effect his current loan? Is it still 140? I realise there will be a new loan for the new property just getting my head around things.

Thank you

 

His equity is property value (300) minus debt (140) = 160. i.e. his equity includes his 20% deposit in this case.

If he releases some/all of this equity to purchase another property, his debt relating to the first property will increase and his equity in the first property will decrease.

 

Really? I was told on here equity is 80 % of property value minus debt?

 

If Tim is smart his new $100k loan will be a separate split. So it has no direct effect on the first loan.
If you are thinking tax, then the interest on the $100k loan will be deductible against what it is used for - if used for income producing shares the interest is deductible against the dividend income.

 

This is wrong.
Equity is the value less the debt.

You might be thinking of 'useable equity' which is what the banks may potentially lend you secured against the property.

 

Only if the property just fell in value by 20%

 

Oh I see, Tim should never use his own house as collateral so he would not use "usable equity"

 

Provided you meet other repayment criteria.
House 1 worth $300k and usable equity of $150k
You could get a loan for $300k to buy a house

You have now have property "worth" $600k and owe the bank $450k with over 20% equity still of $150k

 

well, what would he use then?

 

House worth $300k owe $150k equity is $150k i guess total equity

As fair as Bank is concerned for loans $300k - 20% so $240 - $150k is $90k usable equity

 

What I mean is he would split it like you said earlier meaning if the investment went bad then his own house would not be effected at all.

 

His house would be used as collateral for the loan and if he defaulted the mortgagor could take possession of the house.

But he should avoid cross collateralising securities which is using 2 securities for one loan.

 

I am getting a greater understanding of equity now.

Is it as simple as using a different bank for house 2? I am starting to understand equity more, its basically re draw against the value of your property and the loan amount

 

This may help
Terryw’s Ideal Loan Structure

 

This looks like a great read, lots to take in. Thank you