How is equity calculated?

[Deactivated] on 16/02/2016 - 22:59

Howdy

This is my current situation (amounts changed to simplify calculation but adjusted for accuracy):

Purchased PPOR in August 2014 for $500,000, paid $100,000 deposit, property today valued at $550,000. Have $100,000 in cash sitting in offset.

Me (AU citizen) and de-facto missus (UK, on bridging visa awaiting temporary residence approval) both working full time with combine income of $100,000/yr.

Toying with the idea of getting an IP, spoke to a broker earlier on the evening and he was quite hard to understand as English is not his first language. After doing some calculation he said I could borrow an absolute max of $150,000.

Does that sound right? I clearly have no understanding of how equity works… I thought current value ($550,000) - loan remainder ($400,000) = $150,000, which is 50% more than what I had when I purchased my PPOR, plus $100,000 cash = $250,000 so I should at least be able to borrow another $750,000?

I will call another broker later on the week that I can properly communicate with, in the meantime I thought I could ask the financial experts of the interweb.

Thanks heaps in advance :)

Financial

Comments

  • BigTed on 16/02/2016 - 23:16
    +1

    Your calculation of equity is correct - but your borrowing power is a different issue.
    You will need sufficient income to service your original loan, plus the IP one (together with any rental income).

  • quop on 16/02/2016 - 23:27
    +3

    current value ($550,000) - loan remainder ($400,000) = $150,000

    ^that's your equity - see definition. The amount you can actually borrow against your PPOR, assuming an LVR of 80%, is $550,000 * 80% - $400,000 = $40,000.

    If you're looking to purchase an IP, what you could do is use the $100,000 cash in your offset plus another $40,000 of equity that you can extract, and use that towards a deposit and purchase related costs.

    If you're serious about investing in property make sure you speak to an investment savvy broker - someone who has their own portfolio of IPs themselves and knows how to structure your loans to not just purchase IP1, but set you on the path towards IP2, IP3 etc. There's a few names here. I can give you a few others if you're interested.

  • tomleonhart on 17/02/2016 - 08:55
    +3

    Broker here:

    The amount that you can borrow is based on your income/s not how much equity you have. E.g. You can have 750k in cash and no job and no bank will lend you 750k.

    Like quop said above, although your place has appreciated by 50k, the bank won't let you that 50k but 80% of your current property value. 550k x 80% = 440k that they are willing to lend against your PPOR. That leaves you with useable 40k equity in your current place.

    Hope that makes sense!

    • ddxsamx on 17/02/2016 - 11:48

      If my current PPOR has 300k equity, how much of an income would I need to tap into the full 300k?
      Can I also include my GF's income (Not on PPOR title) if we will be buying IP2 together in the future?

      • tomleonhart on 17/02/2016 - 11:59

        hi ddxsamx,

        It's too hard to answer that question without taking into account, your living expenses, your credit card limit, your personal loan if you have any, etc etc..

        You can include your GF's income but just remember that means in case of separation she will get the % based on how much income she contribute in the place. Unless you guys plan on a long term relationship, personally i dont think it's a good idea !!

        • ddxsamx on 17/02/2016 - 12:18

          Ah yeah true, thanks tomleonhart! Unfortunately I was limited by my income so could not get the max 80% worth loan and leave the rest in the offset. With a combined income with the GF, we would probably be able to tap into it.

          Yeah, its a long term relationship, but yes, this would be in the future when we get engaged/Married.

          Thanks again :)

      • quop on 17/02/2016 - 13:17
        +1

        By "buying IP2 together" do you mean
        1. having both names on the title,
        2. having both names on the loan, or
        3. all of the above?

        More of a rhetorical question, to highlight that it's something you should think about carefully before signing anything, and be clear on what you want to do, especially if you have plans beyond IP2. You may wish to speak to a property savvy tax accountant so they can give you advice specific to your situation. Meanwhile here's some general information/reading that might fuel your thinking:

        Tax Advantages of Buying property in 1 name only

        Should I buy in my name because I earn more money and can claim more?

  • born2reign on 17/02/2016 - 11:12
    +2

    Get a rental appraisal done and provide this figure and select interest only repayments and investment property when applying for the new home loan. That will free up some additional burrowing power, on top of your normal salary. Note that banks nowadays will only consider 50-80% of the appraised rental value and approx 30% of your annual salary when factoring in your borrowing power.

    If you still don't have enough for what you are looking for, than an option is to put your British missus on the application as well as her income would then be considered as well. This obviously carries additional risk for you and you may also run into problems getting approval for a non-resident of Australia. Don't make any hasty decisions :)

    Good luck!

  • [Deactivated] on 17/02/2016 - 11:21

    Thanks all for the replies, I did not take into consideration of LVR 80%, this makes sense now.

    Due to boring reasons $40,000 cash need to stay fluid, so I'll have $60,000 cash + appreciation to spend on a what is evidently now a cheaper IP1.

    Assuming I do not acquire IP1, discounting PPOR appreciation for the next 10 years. Assuming my salary is a constant for the next 10 years, does that mean my borrowing power for the next 10 years will also be a constant? How am I realistically supposed to acquire IP1, IP+n…?

    • tomleonhart on 17/02/2016 - 12:05

      to be honest, 100k combined income for 2 ppl are not very high.

      And if you're looking to purchased in Sydney where median price pretty damn high, I'll say the chance to acquire IP1, IP+n is pretty slim. Unless you can find a really good property with + gear.

      • [Deactivated] on 17/02/2016 - 12:17
        +1

        The actual combination is a little bit higher but potatoes and potatoes, and you are absolutely right, unfortunately that is not likely to change in the foreseeable future for us.

        I'm not bounded to buy in Sydney, was purely due to knowing about its suburbs better. I guess back to drawing board and agent talks and research for further out places.

        • tomleonhart on 17/02/2016 - 12:54

          That's what i am doing :)

        • [Deactivated] on 17/02/2016 - 14:15

          @tomleonhart:

          I'm sure being a broker is a great advantage, do you have any tips on how to start looking in a unfamiliar area? Speaking to any real estate agents in any area and they're surly all going to shove their local portfolio down my throat…

        • tomleonhart on 17/02/2016 - 15:25

          @minty: I can assure you that it's not an advantage.

          Unfortunately I don't have any tips in investing in real estate, because if i do I wouldn't be on ozbargain looking for cheap deal! :P

  • Slippery Fish on 17/02/2016 - 12:14

    If I was you and I realy wanted the ip, id look outside the capital. Housing prices can easily be 25-50% less 2-3 hours outside.

    Im just a young bloke though so could be bad advice if im not factoring in something.

Login or Join to leave a comment
Login Join