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!!)





1 user(s) are reading this topic

0 members, 1 guests, 0 anonymous users

 

Get your FREE Baby & Toddler Show ticket!

Get your free ticket to the Sydney Essential Baby & Toddler Show for September 25-27 - register online now.

Win Love Child Season 1 & 2 on DVD

To celebrate the release of Love Child Season 2 on DVD from July 9, Essential Baby and Universal Sony Pictures Home Entertainment are giving away Love Child Season 1 & 2 on DVD to 13 lucky winners.

10 things I wish my pre-baby self knew

I look back at my pre-baby self and laugh at how ridiculously easy I actually had it. I remember complaining about how tired I was and how little time I had.

Creative ways to store your child's art

Ideas for storing your child's artworks have moved on from sticking them to the fridge door before guiltily dumping them in the bin.

Child abuse ignored because 'it's not your children': Waleed Aly

Waleed Aly takes apart the immigration law that's designed to "protect politicians"

How a newborn niece changed star Australian basketballer's life

In August 2013 star basketball Abby Bishop was 24-years-old and in the prime of her sporting career.

Guilt is my new shadow

No one warned me that when I gave birth there would be an additional side order of guilt.

12 brilliant Ikea hacks for kids’ rooms

Check out these creative upcycling ideas that transform regular Ikea items into something special for your little ones.

Child's nightmare about 'man with a light' turned out to be real

For three days, a three-year-old boy had been saying there was "a man with a light" outside his window at night.

Toilet truths after giving birth

The thought of going to the toilet after giving birth is often feared, but there are ways to make it less painful.

Woman asks strangers for $1 million to stop her having an abortion

An anonymous woman is taking an extreme moral and ethical stand by seeking $1 million in donations to prevent her going ahead with a planned abortion.

How a woman's dying wish made another woman a mum

"I kind of think about, 'What did I do beforehand? What kept me so busy back then?' Because now I'm really busy."

The parenting do-over: what six parents did differently second time around

In playgrounds across Australia, you can hear parents lamenting, "When we have our next baby I swear I won't be doing THAT again".

A solo birth, a wasp swarm and a forest fire: mum and baby's amazing story of survival

Desperate, out of petrol and low on food, a new mother lit a fire in the hope of attracting attention.

Boy found on swing died of hypothermia and dehydration, autopsy finds

The story was chilling and heartbreaking: a three-year-old boy was found dead in a Southern Maryland park, his mother pushing him on the swing.

Child's play and laughter help battle fatigue

Feeling fatigued? Uh-huh, thought as much. Join the queue.

Dad shares entertaining 'how to hold a baby' clip

For many new dads, their own child is the first baby they have ever held. So one dad has posted an instructive YouTube video titled "How to Hold a Baby".

The Australian baby with 100,000 Facebook fans

She may be only eight months old, but Egypt has already amassed more than 100,000 fans and received a letter from royalty - Hollywood royalty that is.

Tongue tie: what you need to know

Tongue and lip tie can lead to many problems for babies - and their parents. Here are the signs of tongue tie and how it's treated.

My daughter is small but that doesn't matter

My daughter may be small, but it's my job as her parent to refocus back where it belongs - on who she is as a person

Wet wipes linked to rise in allergic reactions

The government has issued a health warning after a rise in allergic skin reactions has been linked to a preservative found in some wet wipes.

 
Advertisement
 
Advertisement
 
 
 

What's hot on EB

27 funny ultrasound pictures

Ultrasounds give you a look at your growing baby ... and sometimes what appears to their womb-buddy, or your bub in an amusing position.

What all parents should know about safe babywearing

A picture of Ryan Reynolds always gets the girls talking, and a recently shared photo has done exactly that - but this time, it's for all the wrong reasons.

Baby's head shape reveals potentially fatal condition

Thinking her baby just had an unusually shaped head, a mother was shocked to discover it was instead linked to a dangerous condition.

Why IVF success rates may not be what you think

Transparency, accountability and responsibilityare essential measures to protect IVF vulnerable patients.

Mother-in-law 'from hell' inspires survival guide

The happily ever after Nicola Milan had imagined wasn't to be – and she blames her mother-in-law.

Owning a pair of nail scissors does not make me a hairdresser

It's been a whole year since sleeping in until 10am. A whole year since having a peaceful shower.

The 83 children who were tragically let down in the last decade

Over a 10-year period, 83 children died from domestic violence abuse in NSW, with three quarters of the victims aged five years or under, the NSW Ombudsman has revealed.

Is it reasonable to expect your partner to give up drinking in pregnancy?

From the moment that I fell pregnant with my son, I realised just how much my life had already started to change.

Stroke victim joins class action against makers of popular contraceptive pill

"I was terrified I would always be this way. The pill needs to come with a much higher warning."

Sexy time

Why you should get excited about scheduling sex

Unfortunately, the belief that sex should always be spontaneous is a myth. It just isn't.

When newborn photoshoots get messy

When it comes to newborn photoshoots, it is all about the timing.

Expert Q&A: Gross motor skill development in toddlers and preschoolers

Dr Katie Heathershaw answers questions about jumping, toe walking, riding a bike and being pigeon toed.

'Samuel is our firstborn, and he will never be forgotten'

Having lost their firstborn at one day old, the Carrolls were overjoyed to welcome their daughter Isobel into the world a year later.

Dad takes miraculous catch while feeding baby

One American father has taken multitasking to a new level at a Cubs-Dodgers baseball game at Wrigley Field.

Name your baby Quinoa, win a $10K gift card

Choosing a name for your little bundle of joy is always a major decision. It can be something traditional, trendy, creative … or inspired by the menu of your favourite chain restaurant.

On the 10th anniversary of my son's death

This day marks a significant day. Today marks 10 years since I lost my son Kai.

'Help - my toddler hits me!'

My toddler has started hitting when he gets frustrated, is feeling ignored, or just thinks it might be fun.

The top 6 misleading parenting terms

From 'morning sickness' to 'the terrible twos', there are many parenting terms that are misleading.

When 'good' nannies go bad

While most nannies take pride in their work, there can be some who have a hidden side.

Woman hospitalised for skinny jeans injury

Beware: skinny jeans might be bad for your health.

Gauze seeding: the bacteria-breeding birth trend

A number of women having caesarean deliveries are now taking steps to give their baby a better 'microbiome' start in life.

Jimmy Fallon writes new children's book for dads

Jimmy Fallon, host of NBC's The Tonight Show, recently wrote a children's book about every father's secret wish for their baby's first word to be "dada" - not "mama".

28 names for babies born in winter

Looking for some baby name inspiration for a bub born during the colder months? Here are 28 options from around the world to consider.

 

FREE TICKET

Get your FREE ticket to the Baby & Toddler Show

Get your free ticket to the Sydney Essential Baby & Toddler Show for September 25-27 - register online now.

 
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.