Calculating your equity

Equity scaleHow much equity do you have? Your home could be a hidden gold mine of equity, ready to be turned into cash for you to spend! The amount of equity you have really depends on the the value of your home & how much you owe to the bank. The difference is your equity.

Calculating your equity

Don’t worry it is easier than it looks! The formula is:

House value – Loan amount = Equity

So lets say that your home is worth $500,000 and you owe the bank $300,000 then the formula looks like this:

$500,000 – $300,000 = $200,000 in Equity

As a general rule if you draw down on equity such that you owe over 80% of the value of your home, then you may need to pay Lenders Mortgage Insurance (see below). Many home equity loans are restricted to be a maximum of 90% of the property value.

The difficult bit…

The difficult part is working out just how much your house is really worth. Real Estate Agents often give you an overinflated estimate of the value of your home. This is because then it is more likely that you may ask them to list the property for sale through them. There is so much media hype about prices going up and down it it actually quite hard to find out an accurate measure for the value for your home.

If you would like to know more about working out the value of your home for yourself then read this article on how to value a property.

Lenders Mortgage Insurance (LMI)

Lenders Mortgage Insurance is insurance that protects the lender in the event that you can’t repay your home loan. Lenders take out this insurance if your equity loan is for more than 80% LTV. The LMI premium charged is paid by you, the borrower, not the lender!

This can end up to be much more expensive than people think! If you are thinking of accessing your equity then use this Lenders Mortgage Insurance calculator to find out what your premium will be. Make sure you shop around! Different banks have different premiums, and they only rarely tell the general public what they are.

Equity Loan Policy

Have you got the best possible interest rate on your equity loan? That’s great, but it isn’t going to do you any good if your application is declined! Before you apply for a loan, take the time to learn what the banks are looking for and present your application to the right lender in the right way.

Firstly, many banks simply are not interest in equity loans. They don’t have the appetite for this type of business. In particular many lenders do not like to consolidate multiple unsecured debts. They know from past experience that this type of application is a much higher risk, and so typically if there are more than three debts being rolled into one then they will decline the application.

There are specialist lenders that actively seek people who are consolidating debt. Typically they will want their borrowers to have a lower LTV ratio (also known as the LVR). Ideally your loan should have an LVR of less than 80%, that means that your mortgage is no more than 80% of the valuation of your house. The better your repayment history then the better your rate & the better your chances of approval. You must have real estate that you own as security for an equity loan.

The loan purpose is the other main area that catches people out. What are you releasing the money for? Did you know that each lender has their own opinion as to what is a low risk loan purpose & what is a high risk? As a general rule the higher risk loans types are for consolidating tax debt, going on holidays, “unknown or undisclosed” purposes or business ventures. Low risks are refinancing to get a better interest rate, investing in shares and buying an investment property.

There are a range of other lender guidelines that can catch you out if you aren’t careful. Most lenders have guidelines requiring the following:

  • Minimum time in your job, usually six months.
  • Minimum asset position, usually dependent on your age.
  • Minimum serviceability ratio, you must be able to afford the loan even if rates increase.
  • Minimum credit history / credit score.
  • Acceptable security as collateral for the loan.

Use the advice of a good mortgage broker such as Dargan Financial to help you choose a lender that you qualify with and to negotiate the lowest interest rate for your equity mortgage. Navigating the minefield of bank policies is impossible for someone who is outside of the industry, it is essential that you seek professional advice.

Equity Shares Definition: Property Investment

Couple with part ownership in an equity shareThis term can be involved with shares and with real estate. Here we will be looking at equity sharing and property, not with shares.

Investors and occupiers basically share ownership of a property. They each contribute to the down payment, with the home appreciation, or ‘equity’, being shared between the parties on sale of the property.

The title deed to an equity share property defines the relationship of every owner to every other owner. If there are couples involved this can mean several relationships need to be stated on the one deed.

Australian expats and other non-residents often go into an equity share arrangement whilst they remain overseas. As it is sometimes more difficult for them to borrow as much of the property value, or to receive the same low interest rates as Australian citizens. This arrangement can make investing in Australian properties easier and more affordable.

When the property is purchased the parties decide on Ownership percentages. They normally determine this based on the contributions of the buying costs, also called the initial capital contributions. As an example, the investor could own 60% of the property and the occupiers could own 40%.

At the end of the term determined by the equity sharing contract, the investor or the occupier could become sole owners by buying out the % share of the property they do not own. With no buyout, the profit would be distributed 60/40 on the sale of the property.

There are two types of costs associated with equity sharing. Initial capital contributions as mentioned above, and additional capital contributions. These are reimbursed before profits are allocated and shared in any way the owners decide.

Property tax and insurance are not necessarily included as contributions as they are not part of the purchase costs, but may be considered prepayments of owning the property. If needed remember to factor in lenders mortgage insurance too.

Initial capital contributions include the purchase costs of owning the property such as the deposit, bank fees and inspection fees. Additional capital contributions include additions to the property that do not depreciate such as new bathrooms, kitchens and carpets. Other costs, including mortgage payments, property taxes, insurance and routine maintenance, are not shared. They are just paid by the occupier.

Tenants in common is the most popular way for unrelated people to create an equity share as it protects each party from seizure of their interests by creditors of the other owner. It also means in the event of the death of an owner(s), their interest does not automatically pass to the other party. If the deceased has a will it will pass to whoever is mentioned, if not it will do whatever is provided by law.

Joint tenancy is another way to own property. In the event of death the equity share will pass to the remaining owner, and not go by their will. As the transfer needs no will or court involvement, this is the most popular way for related people to sign up for an equity share.