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What is equity and how to use it to purchase another property

What is equity and how to use it to purchase another property

August 31, 2023

So what is equity? According to Investopedia Home Equity is the value of a homeowner's financial interest in their home. In other words, is it the actual property's current market value less any liens that are attached to the property?

You still must be asking what this means and how equity is used, here is an example. Let's say you have a house that is valued at $ 1 million and your existing mortgage on this house is $500,000, as this is your owner-occupied property in New Zealand you can borrow up to 80% of this property's value. 

This means you could borrow up to $800k on the property, in this example the equity available for you to use to purchase a new property is $300,000

So how does this all work when purchasing a new investment property? This is what lenders call cross-collateralization, which is when multiple properties are used together as security for a loan from one bank. With current Reserve Bank regulations 80% lending can be used against owner-occupied properties and 65% against investment properties, this is the general rule of thumb without getting technical with exemptions as that is another topic on its own!  

How will the calculation look? Below is an example.

Scenario - You are looking to buy a new investment property for $650,000

Existing lending $500,000

New lending $650,000

Total Lending $1,150,000

Existing property $1,000,000 80% of value = $800,000

New property $650,000 65% of value = $422,500

Total value 1,650,000 max lending=   $1,222,500

LVR= 69.69% 

In this simple scenario, there is enough equity in the existing house to purchase a property for $650,000 as the max lending available is $1,222,500 and the total funding required is $1,150,000 the following scenario fits what banks call cross collateral exemption. 

However, this is a basic example for you to understand how equity works many other factors go towards the application and getting your funding approved with banks which is why it is best to contact Benchmark Mortgages to go through your financial position.

Once we have had an in-depth discussion we will come up with different proposals and strategies for your specific requirements. 

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