Jump to content

Can someone explain the use of equity?
In layman's terms!


  • Please log in to reply
13 replies to this topic

#1 Beth E

Posted 18 January 2013 - 12:43 PM

Hi, hoping that someone can explain simply to me how you can use the equity in your home to buy, in our case, a block of land.  

How do our repayments change, and is it worth it?  I am confused as to how you can use the (equity) amount and what it costs.

Pretty ignorant, hoping there are some clever clogs out there to explain to a dummy like me!

Thanks!!   original.gif

#2 BetteBoop

Posted 18 January 2013 - 12:49 PM

You buy a house for $400 000. You pay off $200 000.

You have $200 000 in equity. This is the difference between the amount your asset is worth and what you owe on it.

This is also called the Loan to Value Ratio or LVN. Another way to look at is savings that you can't withdraw.

So, because you have $200 000, you can use this money as a deposit to buy other things. If you don't want to sell your house to get the cash itself, you use the asset (your home) as security for any loan you get for other things.

So, let's say you buy an investment property for $400 000.

The loan for that investment property is secured against not only the investment property itself, but your home. If you default on the repayments, the bank can take your home to repay the debt.

Equity increases your capacity to borrow money for other things. It doesn't do much else.

#3 Beth E

Posted 18 January 2013 - 12:52 PM

Thanks so much BetteBoop!  That explains it really well.

#4 secret~sammy

Posted 18 January 2013 - 12:59 PM

House worth $500k
Loan of $300k
=
Equity of $200k.

The bank will (subject to all the usual criteria) loan you up to the $200k to invest/spend.

It may be a new loan account or added to your old one depending on how you set it up but in terms of repayments think of it as a new loan of $X to work out how much extra it will cost.

#5 ~*MissPriss*~

Posted 18 January 2013 - 02:03 PM

The bank will usually only lend you up to 80% of the value of your property (excluding LMI) so if your property is with 400k and you owe 200k yo could borrow another 120k. You could either put you house as security against another investment property, or just take out 20%, the deposit required for an investment property, out of your home loan, and then have the investment property as its own security without using you homes title against the property. You would need to speak with a tax specialist and work out the the way that would be the most tax effective (if any difference at all)

#6 TopsyTurvy

Posted 18 January 2013 - 02:17 PM

Also don't forget to take into account the current worth of your property also.

So say you bought the house 15 years ago for $400000
You have paid off $200000

But in that time the value of your house has increased to say $600000

Which means your equity is actually $400000



#7 Beth E

Posted 22 January 2013 - 06:58 AM

Thank you all very much!

Rethinking the idea now..   unsure.gif

#8 lozoodle

Posted 22 January 2013 - 07:05 AM

Beetlebop summed it up nicely.

We did exactly this to purchase our house, we had no deposit as we werent planning to buy yet but DP had a unit at the time worth about $350,000 (in his name only) and a fair bit of equity in it and also the rent received on it almost covered the mortgage repayments at that time, and now actually is more than the repayments. We both had decent paying jobs and our repayment capacity along with the equity in his unit (used more as security, rather than actual $ towards the next property) was enough for the bank to lend us the full $400k required to purchase our house.

We later used equity in our house to purchase another investment property.

Its quite risky and you have to be sure you can cover repayments should unforeseen things happen and your property remains untenanted or something, but for us its worked out very much in our favour.

Its a bit weird to think I've never actually saved for a property but have three of them.

#9 bebe12

Posted 22 January 2013 - 07:09 AM

HI,

Do be careful neighbors of ours last year lost their house and rental property when the tenants they had trashed the investment house, leading to no rent coming in and big repair cost.

They now have a much smaller unit and they are having to start again in terms of saving for retirement. (lucky for them their the unit and house sale gave them just enough to cover debt and buy again)

#10 ~spirited~

Posted 22 January 2013 - 07:20 AM

We've been wondering about this as well. On paper, we own our home outright, but in reality, we owe a family member approx 300K. We have an arrangement to repay this loan, interest free. We bought our home for $750K 12 months ago, so I imagine the value of our home would not have changed much.

We have a small amount of savings, but will need to purchase a new family car this year, and are hoping to do alterations and additions to our home within 5-10 years. We are currently not adding to our savings because we are on one income (i have been on mat leave for 21 months and will be for another 12 months with DS2 arriving in May). We have just starts thinking about seeing a financial advisor, because surely with our financial position there should be something we can do?

Sorry to hijack your thread, OP! Just something we are interested in as well.

#11 ~spirited~

Posted 22 January 2013 - 07:25 AM


DP

Edited by ~spirited~, 22 January 2013 - 07:26 AM.


#12 Beth E

Posted 22 January 2013 - 07:38 AM

No problem Spirited!  

Yes, it is a bit of a confusing area..  

I don't know if we want to go down that track now, as we weren't going to buy an investment property, it was going to be a block of land somewhere to build on at a later date, so no rent money coming in to cover repayments.

Oh well, back to the drawing board..

#13 ~spirited~

Posted 22 January 2013 - 07:46 AM

Yeah, I think we'd do it for an investment property, and ideally the mortgage repayments would be covered by the rental income! Unless we reduce the amount we repay on our current loan (which we could probably do) we don't have enough income to cover any additional expenses until I return to work (looking at April 2014).

Good luck Beth, I hope you get your block of land! I'd love to build my dream home original.gif

Edited by ~spirited~, 22 January 2013 - 07:47 AM.


#14 Beth E

Posted 22 January 2013 - 07:48 AM

Yeah, it sounds like it might be a tricky time to do it..

As a PP said, equity really only gives you the opportunity to borrow more money, it isn't the actual money IYKWIM!  (The PP said it much better!!)





0 user(s) are reading this topic

0 members, 0 guests, 0 anonymous users

 

11 things that will happen when you're breastfeeding

After having three children and various degrees of success feeding them all, there's one thing I can tell you: virtually nothing will go as planned.

Surgery for baby born with a tail

A baby born with a tail has had it removed after doctors feared the birth defect might cause long term damage to his lower body.

When 'skin to skin' becomes a family affair

An adorable photo of a little boy and his dad enjoying skin to skin contact with newborn twins is melting hearts everywhere.

35 hilariously weird 'top tips'

Who would have thunk it? We never knew there were so many uses for feminine hygiene products. 

Pregnancy skin woes: acne, dry skin, itchy skin

Here are some of the most common skin complaints in pregnancy and how to tackle them, face on.

Watch this fun dance class for babywearing dads

Is there anything sexier than a babywearing dad?

Parents, this is how to cut grapes to avoid choking

One mum has learnt a harrowing lesson about the best way to cut grapes to make it safe for toddlers and little kids to eat.

When your kids have totally different temperaments

Sometimes it has felt like whiplash parenting. She perches watchfully while I vacuum; he tries to climb on and go for a ride.

How do our stress levels influence our baby?

Since having my second baby a number of people have commented on how placid, content and settled he is and, similarly, many have commented on how this is a reflection of how I am with him.

Separation anxiety isn't just for kids

Despite its prevalence, most doctors tend to be reluctant to diagnose adult patients with separation anxiety.

A charm bracelet, a boy, and my beliefs questioned

I was staring at the face of my son, realising that my once steadfast decision to be open minded was quickly unravelling at the seams.

Why I'm so grateful for Hayden Panettiere's PND honesty

There are baby steps and giant leaps forward. But there are steps backwards, too. And, oh, how they can hurt your heart.

The heartbreaking story of little Moko

The mother of 3-year-old Moko Rangitoheriri said she should have picked up on the signs. {Warning: distressing content}

Kate Beckinsale and teen daughter recreate birth photo

Kate Beckinsale has recreated her daughter Lily's birth photo, 17 years after she was born.

The adult-size stroller you'll want to test drive

It's one of the biggest baby related purchases they will make, so it makes sense that parents-to-be get a chance to road test a stroller.

Pregnancy announcement shows the reality of IVF

It's a long way from baby booties or bump shots people have become accustomed to in social media pregnancy announcements.  

Soleil Moon Frye welcomes fourth baby

"Punky Brewster" is a mom again, for the fourth time. Soleil Moon Frye announced the birth of her baby boy, Story, on Instagram Wednesday.

Mum breastfeeds baby found abandoned on the street

A woman has been praised as a "beautiful mother" after breastfeeding a baby which had been abandoned at the side of a street. 

A birth with a difference: the 'natural caesarean'

We've shared stories of gentle caesareans before, but a new video shows a new option called a 'natural caesarean'.

Baby name inspiration by music genre

If you're all about the music, then you'll need a musical name for that baby. We've got all the lists for you by music genre.

Giving effective instructions to toddlers

One of the most common errors made by parents is in how they give instructions to their children.

 
Advertisement
 

Top 5 Articles

Advertisement
 
 
 

What's hot on EB

The babies who are one in 70 million

Bethani Webb was excited to find out she was pregnant, but the first time mum did not realise she was carrying four babies not one.

Cafe offers breastfeeding mums a free cup of tea

A Sydney cafe is offering breastfeeding mums free cups of tea in a bid to show support for the right of women to nurse their babies wherever they choose.

To snip or not to snip? When the decision is not clear cut

Jamie Oliver, who considered a vasectomy, is to be a father again. A fellow dad reflects on his own decision 11 years ago

Doctors stunned by rare twins born almost six weeks apart

To everyone's surprise, Kristen Miller "kept doing better each day", keeping her second baby safe.

Baby book ideas for modern parents

Before my son was born I was given a lovely baby book full of blank pages waiting to be filled with weights and heights and first words.

The adorable smile of a baby seeing his mum clearly for the first time

There is no doubt seeing their child smile for the first time is an unforgettable moment for parents everywhere.

Mum tells how toddler 'nearly hung himself' in cot mishap

When Alison Johnson put her 18-month-old Caleb down for a nap, she had no reason to believe her son was in any danger.

Babies are still switched at birth? Yes, it can happen

All my panic and tears aside, my biggest question looking back is about the kind of security measures used in the maternity ward.

Doctors slammed for taking selfie with newborn

Everyone who visits a mum in hospital in the days following childbirth wants to get a photo with the new baby.

ergoPouch Twosie Sleepsuit for winter breastfeeding

Finally, there's a way to keep warm while breastfeeding through winter.

Health check: How long does sex 'normally' last?

What to do with this information? My advice would be to try not to think about it during the throes of passion.

When breastfeeding sucks: fixing common problems

From niplash to tight boobs, biting to milk supply issues, Pinky McKay looks at common breastfeeding issues and how to solve them.

10 things I've learnt in my first six months with twins

Six months on we're all still alive, and the more we get to know each other the easier the days become.

Mum's loving kiss leaves baby fighting for life

Kirsty Carrington thought nothing of giving her newborn son a kiss, little did she know it would leave the baby fighting for life.

When doing chores is your new 'me time'

After children, 'me time' looks a little different.

Get going: 14 travel strollers for families on the move

A stroller can make or break travelling with a baby or toddler. Here are 15 great single travel stroller options.

10 ways toddlers are terrific

It always pays to remind yourself of how terrific toddlers can be - they're little like this for such a short time

 

Vintage Toys

The toys of your childhood

Take a trip down memory lane with these vinage and retro toys that you may have had in your childhood or your parent's childhood.

 
Advertisement
 
 
Essential Baby and Essential Kids is the place to find parenting information and parenting support relating to conception, pregnancy, birth, babies, toddlers, kids, maternity, family budgeting, family travel, nutrition and wellbeing, family entertainment, kids entertainment, tips for the family home, child-friendly recipes and parenting. Try our pregnancy due date calculator to determine your due date, or our ovulation calculator to predict ovulation and your fertile period. Our pregnancy week by week guide shows your baby's stages of development. Access our very active mum's discussion groups in the Essential Baby forums or the Essential Kids forums to talk to mums about conception, pregnancy, birth, babies, toddlers, kids and parenting lifestyle. Essential Baby also offers a baby names database of more than 22,000 baby names, popular baby names, boys' names, girls' names and baby names advice in our baby names forum. Essential Kids features a range of free printable worksheets for kids from preschool years through to primary school years. For the latest baby clothes, maternity clothes, maternity accessories, toddler products, kids toys and kids clothing, breastfeeding and other parenting resources, check out Essential Baby and Essential Kids.