Equity is the value of an asset minus any debt outstanding.
In the case of property:
In the example above the $500,000 property was purchased with a 20% deposit ($100,000). Over time the property has appreciated in value and the debt has been paid down giving the owner equity of $600,000 – $350,000 = $250,000.
Equity in this particular property is now 41%
If you have equity, you have the opportunity to use that equity as security for purchasing an investment property.
Equity is calculated on the current market value of your home (or investment property) minus what you owe the lender. As an investor you can access up to 80% of your home equity (without the need to take out Lenders Mortgage Insurance or LMI)
In the example the home above was purchased for $500,000 with a 20% deposit ($100,000) Over time the property has appreciated and now has a market value of $600K (determined by a professional valuer’s report nominated by the lender) and the loan has been reduced to $350,000..This means that there is now equity of $250K.
Available equity is calculated by retaining 20% of the market value ( $600K x 20% = $120K) and taking that away from the total equity $250,000 – $120,000 = $130,000
This $130,000 can then be used as security for another property.
Normally the lender will then allow you borrow 100% of the purchase price of the investment property plus your costs. This means there is no cash outlay required