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

 

The myths and truths of gender swaying

Here are a few popular methods hopeful parents-to-be use to try to get a baby of their preferred gender – and what an expert says about whether they really work.

10 easy DIY Christmas decoration ideas

It's officially time to get into the Christmas spirit. Why not branch out when you put up your tree this year and add a personal touch with a few DIY decorations? We've found the perfect easy-to-make ways to put more festive fever into your home.

The dangerous new trend of glucose challenge test refusal

A dangerous trend is seeing more mothers-to-be declining a relatively simple and painless test to check for gestational diabetes.

Office of Fair Trading reveals naughty toys ahead of Christmas

The Office of Fair Trading has pulled seven toys from shelves ahead of Christmas after they fail safety tests.

Video: Baby boy's trouble with twins

These twin girls will no doubt have fun fooling people in years to come, but nobody will be as confused as baby Landon.

Long-term reversible male contraceptive on its way

Men could soon have access to an injectable long-term contraceptive which works in a similar way to a vasectomy but promises to be easily reversed.

'I tried to kill my baby': one mum's story

After bathing and dressing her three-month-old son, Amanda had a rare moment alone with her baby.

Attack of the 'mummy brain'

I feel that almost every day, someone in my life - be they a friend, family member or complete stranger - feels the need to excuse my behaviour as I have other things on my mind.

Mum of baby who fell ill after drinking raw milk speaks out

A Melbourne mother has described how her son turned grey when he became seriously ill after drinking raw milk.

Australian divorce rate lowest since 1976

Modern newlyweds are now well into their 30s and marriage still offers something powerful a new book argues.

The aftermath of a traumatic birth experience

In Australia, 30 per cent of women find their birth experience traumatic, with 6 per cent going on to develop post traumatic stress disorder (PTSD).

Young mum burns 'from inside-out'

A young mum is in intensive care after she took a friend's antibiotic and wound up with an ailment that is burning her body 'from the inside-out'.

The disagreement that can break a relationship

If he doesn't change his mind, all I can hope is that I will. It would be a waste to spend the rest of my marriage mourning a baby that never was.

Co-sleeping or no-sleeping? Mum videos worst nap ever

One mother's futile attempt to sleep in caught on camera in a hilarious - and very cute - video.

Why children misbehave during the festive season

While we all like to imagine the holiday season as being a fun, loving and bonding experience; often our reality is quiet different.

I was fat-shamed by my doctor

The fear of being weighed is the most significant factor in women cancelling medical appointments - and now weight-shaming has happened to me.

End of an era: no more childcare

As we reach the end of 2014, we're closing the book on many things for another year, most notably childcare. Our last child has attended childcare for the very last time.

The 7-year itch is more like the 10-year itch: study

Contrary to popular belief, making it past the seven-year mark doesn't mean your marriage will be smooth sailing from there on.

Stop telling us that parenting gets harder

I’m sure that parenting will get harder. But life isn’t exactly smooth sailing for many of us right now, either.

Should children be forced to sit on Santa's lap?

We teach kids it’s okay to say no if they don’t feel safe, so why do some parents force their children to climb in to Santa's lap?

Download now: Essential Kids Activity Finder app

Got bored kids? Quickly find the best activities for kids wherever you are in Australia with the Essential Kids app.

 
Advertisement
 
Advertisement
 
 
 

What's hot on EB

Baby born weighing almost 14 pounds

Yes, the bouncing baby girl was born by caesarean section. And mum says no more kids.

The dummy debate

I'm the first to admit that when I used to see tiny babies with dummies in their mouths, I thought "Hmm, lazy parenting." And now I apologise.

'I thought I was an only child'

Imagine meeting your double at a school sports event, or regularly being mistaken for someone you haven't met. Separated twins Margaret and Joy tell their story.

Mums reveal their nappy bag essentials

Ever wondered what other mums carry in their nappy bags? We have, so we asked mums to tell us their must-have nappy bag items.

Toddler died because he wasn't given antibiotics soon enough

A 15-month-old boy would almost certainly be alive today if doctors had given him antibiotics sooner, a coroner has ruled.

VIDEO: moment a toddler falls on to train tracks in Melbourne

Shocking footage has emerged capturing the moment a pram carrying a toddler rolled off a platform and onto train tracks in suburban Melbourne.

Sold on natural birth? Read the fine print

In the excitement and anticipation of a first pregnancy, I ignored the fine print: some women, some of the time.

Child with alcoholic mum who drank while pregnant won't win pay-out

A young child is not entitled to criminal injuries compensation after her mother drank excessively while pregnant.

Superbugs killing India's babies, posing wider threat

A deadly epidemic that could have global implications is quietly sweeping India, tens of thousands of newborns dying because antibiotics no longer work.

Can you teach a toddler to sleep in?

Parents share their tips on getting their early risers to sleep in, even for just a little bit longer.

Keeping your relationship on track as new parents

About 70 per cent of couples experience a slump in their relationship within three years of having a baby. Here's how we tried to get back on track.

America's favourite baby names of 2014

Americans are turning to television, Netflix and sports for ideas for what to name their wee ones.

Carers admit to force-feeding children

As Sydney grieves the loss of Sydney siege victims Katrina Dawson and Tori Johnson, reports have suggested that both died as heroes.

 

How many weeks til Christmas?

On your To-Do list

Get the "Santa" shopping done without the kids in tow.

 
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.