Understanding how equity effects your loan

Discussion in 'Money Management & Banking' started by Bean27, 16th Jan, 2019.

Join Australia's most dynamic and respected property investment community
  1. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    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
     
  2. chylld

    chylld Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    1,581
    Location:
    Sydney
    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.
     
  3. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    Really? I was told on here equity is 80 % of property value minus debt?
     
    Shogun likes this.
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    23,250
    Location:
    Australia wide
    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.
     
    Bean27 likes this.
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    23,250
    Location:
    Australia wide
    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.
     
    craigc likes this.
  6. chylld

    chylld Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    1,581
    Location:
    Sydney
    Only if the property just fell in value by 20% :p
     
  7. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    Oh I see, Tim should never use his own house as collateral so he would not use "usable equity"
     
  8. Shogun

    Shogun Well-Known Member

    Joined:
    26th May, 2018
    Posts:
    640
    Location:
    Perth
    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
     
    Last edited: 16th Jan, 2019
    Bean27 likes this.
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    23,250
    Location:
    Australia wide
    well, what would he use then?
     
  10. Shogun

    Shogun Well-Known Member

    Joined:
    26th May, 2018
    Posts:
    640
    Location:
    Perth
    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
     
    Bean27 likes this.
  11. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    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.
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    23,250
    Location:
    Australia wide
    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.
     
    Bean27 likes this.
  13. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    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
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    23,250
    Location:
    Australia wide
    Cousinit and Bean27 like this.
  15. Bean27

    Bean27 Well-Known Member

    Joined:
    8th Jan, 2019
    Posts:
    186
    Location:
    Devonport
    Terry_w likes this.