Simply broken-down equity is how much your property/asset is worth less the loan you currently have on it. So, in basic principle can be quite easy to work out. On a home worth $750k with a Mortgage of $300k, the difference is the equity of $450k. However, in terms of additional lending there is a difference between ‘actual equity’ and ‘usable equity’ which we’ll go over below, as well as how the banks determine the equity.
The main way a bank will calculate your equity is by completing a valuation on your property. This can be done in many forms of valuations that range from basic online data down to physical inspections. To learn more on these types of valuations see our previous blog post here: What Happens at a bank valuation for a mortgage | Fortify Loans
The term ‘usable equity’ is what is used by Banks to determine how much they will lend you relative to the properties value. Banks will have specific loan to value ratio tiers on what they will lend in specific situations. So, with the example above of $750k home with $300k mortgage, the actual equity is $450k however this is not the ‘usable equity’ as lenders will generally not let you borrow 100% of the property value due to the risk factor.
This is where specific situations are important as well as the Bank who you borrow through. Some Banks have higher risk factors than others and may let you borrow up to 95% of the property for your situation and other Banks might cap you at 85-90% of the property value. You may also not want to pay LMI again, so you’d either need to keep your loan under 80% loan to value ratio or find a lender who waives LMI. More on LMI calculations here How Much Does LMI Add to Your Home Loan Repayments?
There are lots of reasons our clients will draw equity out of their home. But a short common list is the following; home improvements or extensions, purchase investment properties or other assets/shares, consolidate debt under one repayment, private school fees and even selling your house to have a deposit for the next one if your considering up or downsizing. Everyone’s situation is different and chatting to one of our brokers can understand what works for you.
You can speak to one of our brokers here Contact Fortify Loans Hobart, Tasmania
where we will be able to not only complete valuations with different lenders to find the best option, but also a bank whose loan to value and policy fits your situation most.
