With strong capital growth in major metropolitan cities over the past few years, using equity in property has become a popular way to secure finance for property investment.
Property equity is simply the current market value of a property against the amount of mortgage owing. The value of equity grows over time as the value of the property increases and the mortgage is reduced. In addition, equity growth can be driven by renovation or improvements to a property or simply by your ability to pay down your mortgage.
Using property equity has become a popular way to secure finance for property investment.
How to calculate equity in a property
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The basic premise to subtract the debt remaining on a property from the property’s current value. For example, if your property is worth $600,000 and you owe $350,000, then the equity is $250,000.
But this does not mean you will have the ability to access the full amount – many lenders use a calculation on the amount they will be prepared to lend against, to minimise risk. Often, they will use a calculation based on an 80% LVR (loan value ratio):
- Property value - $600,000
- Amount owing - $350,000
- Equity - $250,000
- LVR – 80%
- Lending capability - $200,000
Used wisely, this equity can be used to secure the finance needed to achieve your property investment goals, for example as a deposit on a future property purchase.