Being in the finance, property and wealth business, I pride myself on my ability to explain complex and confusing money concepts in simple terms to everyday Australians.
With this in mind, I wanted to answer a number of questions that are commonly asked by my clients. If you are reading this and have your own questions that need answering, feel free to get in touch with me and I will be happy to put something together to benefit all!
So, what is equity?
When talking about finance and property, equity is commonly known as the difference between what your property is worth and what you owe on the property.
For example, if you owned a property worth $1,000,000 and had a mortgage of $500,000, there would be $500,000 worth of equity in the property. Please see below.
Now, this is where it can get confusing. Just because you have $500,000 equity in your property does not mean that you can release this amount.
Let me explain – the lender will always require a certain buffer, in most cases 20% of the property value. This means that in most circumstances, you will be able to borrow 80% against the property’s value. That is what is known as liquid equity. Please see below.
So, if you had a property worth $1,000,000, less the banks buffer of 20%, you would have $800,000 worth of liquid equity.
However, considering you already have a $500,000 mortgage against your property, you could potentially release $300,000 worth of equity, assuming you had the cashflow to service the additional debt.
When you have completed this equity release, you would have taken out an additional $300,000 mortgage against the property, with the bank depositing $300,000 into your bank account.
So, how would an equity release benefit me?
I can hear you asking: “Why would I take out a $300,000 loan and what would I do with the $300,000 cash I now have in my bank account?”
There are a number of reasons people complete equity releases and each individual will have their own motivation.
Some of the more popular reasons why people release equity are:
- To use as a deposit on an investment property.
- To renovate your home or an investment property.
- To buy shares or managed funds.
- To contribute towards your superannuation.
Hopefully a clear explanation of what equity is and how it can be used for your benefit!
If you have any questions or would like further explanation, please feel free to contact me and I will be happy to chat.
Best of luck!