Equity: Access it or lose it?
For those of you lucky enough to own a property in Sydney or Melbourne, chances are, it’s racked up massive growth in value during the past couple of years. With your newly gained equity, you’re now a whole lot richer – at least on paper.
But don’t assume that this added equity lasts forever. As the market slows down and values start to plateau or drop, you’ll find your equity could also start to dwindle. Therefore, you want to make the most out of your newly acquired wealth while you have it.
But to access it, you need to either sell or take up a new loan to unlock the equity. If you don’t have any compelling reasons to sell, you could consider opting for the latter.
By taking up a loan against your equity, you’re able to hold onto an income-producing asset that’s growing solidly while building your portfolio.
What is equity?
In simple terms it’s the difference between the current value of your property minus the mortgage on this property.
Current property value: $600,000 Mortgage: $300,000 Equity gained: $600,000-$300,000= $300,000
In theory, you have $300,000 equity that you can access. But in reality, you can tap less than that.
That’s because the banks will only lend a portion of the property value – at many banks, this amount is 80%. So in this case:
80% of the property value: $600,000 x 0.8=$480,000 Mortgage: $300,000 Accessible equity: $480,000-$300,000 = $180,000
As you can see, it’s considerably lower than the theoretical amount, but this is still substantial amount. You could use this equity as a deposit for another property, provided you have the income to support it.
How to lock in your equity
When it comes to accessing your equity, there are generally three financial options: refinancing, a loan increase with your existing mortgage or taking up a line of credit.
Refinancing is probably the most common method as it gives you the perfect excuse to review your current situation and restructure your loan to suit it.
Multiple combinations are available using this method, you may fix your current debt and access your equity using a ‘variable interest only split’. This method will allow you to draw on your equity when required and saves you interest while you’re not using funds.
Or you may leave the entire loan and ‘equity release’ variable and take advantage of an offset account to save interest when not using funds.
The loan structure can be designed when discussing your goals with your local bank or myself, so don’t let this confuse you.
Loan top up
This essentially means you’re using your existing loan to borrow by adding to it. It’s a little bit like increasing your credit limit on your credit card.
Advantages can include obtaining a discount on your current interest rate as you’re borrowing additional funds. You may also save some cash on loan establishment fee or monthly fees. Generally, topping up a loan is the easiest way to access your portfolio.
The banks are also now quite strict with their policies and some only allow top ups for investment purposes, so it’s always a good idea to discuss the option with your advisor.
Line of credit
A line of credit (LOC) is a separate loan taken against the property and it works a little bit like a giant credit card limit, where you only pay interest on the money you spend. They are favoured by many investors because of their flexibility.
The downside is that it can have higher interest rate compared to a standard variable rate.
Top tips for accessing your equity
Ensure your property is well-prepared for valuation!
Before you can access equity, the banks will arrange for a valuer to do a valuation on your property.
Once the valuation comes back, the lender will then use that to assess how much they are prepared to lend.
Therefore, you want to make sure you’re getting the best valuation possible by ensuring there are at least three recent sales that are similar to your property and they have achieved good sales price. You should also make sure the property is well presented.
For additional tips or clarification, don’t hesitate to get in touch!