Equity and Usable Equity. How these terms apply to Investment Loans in Australia

July 08, 2013
Michael Dornan

What is Equity? Why does it matter? How does it help you to obtain a loan to buy an investment property? These are questions that your mortgage choice Melbourne broker will be able to answer.

To provide a short definition, equity is the value of a property minus the outstanding loan amount. For example, let’s say that John has an investment property Melbourne based, valued at $500,000, with a loan amount of $200,000. He therefore has equity of $300,000 in that property.

However, not all of that $300,000 is available for John to use. Stephen Zamykal, in his book The Investment Property Plan, uses the term ‘useable equity’ for the purpose of explaining how much money an investor can borrow from a lender. Please don’t confuse this with the term equity.

Usable equity is anything up to the value of 90% of the property’s value minus the outstanding loan amount. For our example of John, 90% of the $500,000 property is $450,000. Minus the outstanding loan amount of $200,000, and John has $250,000 available to him in usable equity.

We use 90% as the cut off used to calculate useable equity, as banks will lend up to 90%—whilst keeping a 10% safety buffer to reduce their level of risk. For further information about how this applies to your mortgage or mortgages, Melbourne’s mortgage choice brokers are available to help you to understand how this applies to your individual situation.

Accessing equity, and the theory behind useable equity, can be applied to all properties—whether it is your home or an investment property. In the case of properties you have only recently bought, there might not be much equity there, but over time you will gain more and more. If you have an existing property, it is important to have your Melbourne mortgage broker analyse whether your current loan is competitive and structured correctly to enable the next purchase.

Posted in: Financial planning

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