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.

Mortgage education

If you’re looking to buy a home soon, then you’ll begin to notice all the advertisements from banks and hear your friends talk about mortgages. With such a bewildering range of features, lenders & options it’s easy to get confused! Getting advice from a friend is great if you are wondering what movie to see, but it isn’t appropriate for a mortgage.

Seeking help from a professional advisor is always the best way to go. However what if you want a second opinion. Many of us don’t have the financial muscle to see several financial planners & get a statement of adivce from all of them.

But don’t worry, there are several ways you can get advice, without the price tag!

  • Try asking a question on a home loan forum, an expert or professional investor may reply to your post with a unique perspective.
  • Read some mortgage articles from an industry insider or specialist journalist.
  • Read a mortgage blog for handy tips on managing your loan.

If you still aren’t sure if your mortgage advisor is acting in your best interests, then ask them some questions to find out what expertise they have and why they are recommending that mortgage:

  • Why do you believe that loan is superior to the others?
  • Can you give me a copy of your commission schedule?
  • Do you have accreditations with all of the prime lenders?
  • How long have you been a mortgage broker for?
  • What other experience do you have in the finance industry?

If all else fails then consider seeking the advice of a second mortgage broker. Unlike financial planners, most mortgage brokers allow you to visit them the first time for free. This is because they are paid when you take out a home loan, it is in their interests to see as many people as they can!

Happy mortgage hunting!

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.