So you’re enjoying the boom that’s sweeping our Capital cities, low interest rates and getting fortnightly calls from agents saying we can sell your property for a record amount, but you’re thinking I don’t want to sell, I want the equity out so I can go again. The question is when should you extract that equity?
There’s two parts to this answer:
Firstly how much extractable equity are we talking about here?
We know that we can extract equity up to 80% with no mortgage insurance – right. We also know that to purchase again at an 80% funding ratio that we’ll need ~25% in, to cover the deposit and closing costs. [20% deposit and ~5% will cover stamp duty, legals, insurance, rates adjustments etc]
Knowing this we can basically calculate how much we can extract out and how much real estate we can go on and purchase. [No servicing taken into account, purely just from an equity position]
So what is your investment property worth? To get a rough idea, you take the agents figure on what they believe its worth, shave a bit off for embellishment and a bit more for the banks assigned valuer and multiply that figure by 80%.
How much can you extract?
Take away the loan amount secured against this property [assuming you’re not cross collateralised –not sure what this means have a read of this article] and this is your extractable equity.
Example:
Let’s say your valuation is $750,000
$750,000 X 80% = $600,000
$600,000 minus the secured debt of say $480,000 leaves $120,000 of extractable equity
What this means is if the property was revalued and you could pass the banks servicing criteria you’d be able to extract out, in this example, around $120,000. But what can you do with $120,000? Is it enough cash to buy another property and if so how much could you buy?
As mentioned earlier we need 25% to cover off deposits and closing costs. Our $120,000 is the new properties 25%. From an equity position your $120,000 would allow you to purchase up to $480,000 of new real estate.
So now comes the question, is $120,000 enough money for you to buy the next property that would fit into your portfolio? If not how much extractable equity do you need? To calculate the amount needed just multiply your desired property’s purchase price by 25% and this will tell you how much you need.
As a rule of thumb, we find unless you have other equity/cash to add to the proposed purchase doing a top up loan to take out $30,000 – $40,000 is basically a waste of time, it involves a lot of work, another enquiry on your credit file against your character and $40,000 is unlikely to let you purchase a high quality investment property without mortgage insurance.
Secondly what do you intend on doing with it?
Are you looking to buy another property or are you just extracting equity to park in an offset account to look at? If it’s the latter then may I suggest this is not a good reason!
If though you plan on buying another property, before you go through all the work of topping up or refinancing your loans how about we work out if you can really afford that new property?
It goes without saying but buying an investment property in today’s market generally means it will be negatively geared to some degree. So my question to you is, how much shortfall are you prepared to contribute to the new property per week/month?
I say what you can afford as opposed to what a bank will lend you because most lenders will loan you more than you’re prepared to pay back.
So if you know how much you’re happy to contribute per week then I can tell you how much property you can *Afford* to go and buy.
To make this easy for you here’s a link to a calculator that I built, you tell me what you’re comfortable with per week, the interest rate and the expected yield and it’ll tell you from an equity position how much you can offer for a property.
So in summary…
How much can you extract?
How much do you need for that next property?
Not enough for a property then what are you intending on doing with it?
Check out the calculator and work out how much you can afford?
All sounds too complicated? Then call one of my team to have an exploratory conversation around what you can and can’t do. Call Tracey on 1300 657 132 and she’ll schedule you a time to talk with one of the team.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).