Equity in your home

The term equity is used to describe the portion of the value of your home which you own. Your equity can be calculated by starting with the current market value of your property and then subtracting the loan amount outstanding to your lender.
e.g. your home (which you may have bought for $300,000) is now worth $500,000 but you only owe the lender $200,000. Your equity is $500,000 - $200,000 which means you own $300,000 of the value of the property. i.e. if you were to sell the property for $500,000 on settlement you would have to pay out your current loan for $200,000 and you would be left with $300,000 cash (minus any selling costs and legal fees of course.)

However, why sell your first property when it is still appreciating in price? Consider using some of the borrowing power your equity in your home will give you to assist in the purchase of an "Income Producing" investment property which you can rent out, the rental income and the tax deductions may mean that you will have to pay very little out of your pocket to start your investment program happening.

If we continue with our example where our home owner has a property worth $500,000 only owes $200,000 and has $300,000 in equity. How much can be borrowed in this instance? Well let's be very safe and conservative and only borrow (by refinancing) up to 80% of the value of the home, now 80% of $500,000 = $400,000 and after we pay out the existing loan of $200,000 we have $200,000 left ($400,000 - $200,000 outstanding loan) minus a few costs.

This $200,000 is secured against the home but can now be used for an investment property, or to invest in a business etc. A good "rule of thumb" is to keep your borrowing on the investment property down to or below about 80% of the property value so after putting some of the $200,000 aside for Legal fees and Stamp duty etc. our home owner should be able to use this as a deposit to finance their purchase of a property up to around $800,000. Don't forget however one of the requirements to qualifying for a loan is the ability to "Service" the loan, i.e. make the loan repayments from the rental income and any other uncommitted income that the purchaser has, so it could be more practical in this instance to purchase a property around the $600,000 mark. Of course as the home and the investment property appreciates in value over time a point will come where there will be enough equity available over both properties to refinance again and pick up another investment property.

Please speak to your Mortgage Broker or Finance specialist to obtain more information on the individual loan products which are available and advice on best product for your situation and contact your accountant, tax advisor or financial planner to gain professional advice on how to your investment plans will affect your tax situation.