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

 

Exclusive Black Friday Sale!

Get over 40% off selected products, including prams, baby carriers, cloth nappies, sleeping bags and much more! 24 hours only, on May 6 - register now for your special code.

Kelly Clarkson shares first photos of son

Kelly Clarkson has shown off the first photos of her son, Remington Alexander Blackstock.

5 childbirth myths that need to be busted

Birth is an unpredictable, mysterious process that intrigues us all, and there is a lot of misinformation out there.

Mum of three fatally shot by toddler while driving

A US mother has been shot by her toddler while driving on a highway in Wisconsin.

All you need is one minute to work out

The seven-minute-work out is old news. Research shows the effectiveness of going hell-for-leather for just one minute.

Pregnant women needed to join diabetes study

Pregnant woman in country Australia will help Adelaide researchers figure out why cases of type 1 diabetes have doubled over the past two decades.

Just announced: the Mountain Buggy Unirider

It's the perfect solution to combat those toddler meltdowns when they no longer want to be in a pram but can't walk long distances.

Authorities euthanise dog that fatally bit a newborn baby

A pit bull mix that fatally bit a 3-day-old infant last week has been euthanised, authorities said.

The push for Medicare to fund lactation consultants

While meeting with a lactation consultant can make an enormous difference to a new mother, it's not a service that is available through the public health system.

Why it's perfectly natural to dislike other people's children

Members of a popular forum are fiercely debating whether it is acceptable to dislike a friend's child.

Woman gives birth on plane, names baby after airline

A pregnant woman who unexpectedly gave birth on a flight has named her new baby after the airline, Jetstar.

Heartwarming photos show the joy of adoption after foster care

Children living in foster care can feel like their future is less than clear. But that uncertainty disappears the day they are adopted by their "forever family" 

'Oh my god, it's a baby!' Mum shocked to give birth

When the cramps started to kick in, Klara Dollan just assumed a painful period was starting.

Mum's Facebook plea: 'Help me find my daughter's father'

Kerryn has a unusual present planned for daughter Imi's 13th birthday celebrations - she hopes to be able to be able to give the soon-to-be the teenager her first ever photo of her dad.

Is it possible for your house to be too clean?

Our houses are cleaner than ever before. But how clean is too clean? Could a sterile home be putting your family's health at risk?

Millions of Monkeys: puzzles that grow with your toddler

Here's a puzzle that grows with them; the Puzzle Grow Pack by Millions of Monkeys.

Baby names from Britpop

If you grew up in the 90s you might want to look to the genre of Britpop music for baby name inspiration.

What to eat and drink when you have gastro

When you catch a bug that causes acute infectious gastroenteritis (gastro), your stomach and intestinal tract become inflamed, causing diarrhoea, nausea, vomiting, abdominal cramping and pain. The last thing you probably feel like doing is eating.

'To this day, I owe her my life'

Would I have survived if I hadn't crossed that street?

Why baby Sonny needs you to vaccinate your children

Caitlin is a firm believer in the importance of immunisation to protect children from harmful and deadly diseases.

Five-year-old's photo captures beauty of motherhood

There is no make-up or special outfits and hairdos, but the five-year-old boy who took this picture captured the essence of motherhood as well as any professional photographer.

Babies know whether you are naughty or nice

Studies have shown that infants in the first months of life try to avoid dealing with social wrongdoers - for example, sharing less with them and helping them less - and they expect others to, too.

 
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.

Exclusive Black Friday Sale!

Get over 40% off selected products, including prams, baby carriers, cloth nappies, sleeping bags and much more! 24 hours only, on May 6 - register now for your special code.

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

 

ENTER NOW

Do your kids love bananas?

This is the comp for you! We have $800 worth of Myer gift cards and boxes of Australian Bananas to be won. Entry is simple: just post a pic of your little one enjoying a banana in the comments of the FB post to enter.

 
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.