3 September 2019
Real Estate Build your equity… for a solid investment foundation
Equity – it’s a common word, with a meaning that’s often misinterpreted… especially when it comes to property. Understanding the various types of equity can help you form the essential foundation to achieve it, leading you towards smarter investment outcomes.
Join us as we investigate how you can leverage your existing property to build your investment portfolio.
What is equity?
Equity in a property sense, is the difference between the market value of your home and the amount you owe on your mortgage. There are effectively three ways you can build it:
- By making regular repayments on the principal and interest of your home loan
- By increasing your home’s value through renovating
- Getting your property revaluated in the hope it increases the market value.
New Zealand equity requirements for investors
If you own a home and have been paying off the mortgage for an extended period of time, it is likely you will have equity in your home and may be able to borrow money in order for you to obtain your first (or next) investment.
If you’re looking to purchase an investment property, 30% equity is usually required. Deposits of less than 30% are considered to have a high loan-to-value (LVR) ratio, which has been buffered by the Reserve Bank of New Zealand to ensure investors aren’t highly indebted.
Let’s take a look at how that would work.
- Your current owner-occupied home is valued at $500,000 (the average house price in the Waikato)
- You have a mortgage of $200,000 (that’s the amount you still owe to your lending provider)
- You have $300,000 in equity (that’s the amount you have already paid off of your home, or the increase in the market value)
- You can borrow 80% of your owner-occupied property’s value, or in dollar terms (in this scenario)
This $400,000 is then deducted from the current amount owing in your mortgage. To determine how much equity that gives you, subtract the $200,000 from $400,000, and you have $200,000 in equity available to invest.
Looking into equity can be a minefield of terminology that’s hard to get your head around. Here are some of the most common words you’re likely to come across:
- Home Equity: Equals the value of the home less the balance owed on the homeowner's mortgage.
- Collateral: an asset that a lender accepts as security for a loan
- Cross-collateral: You access your equity and buy a rental property with a cross-collateral 100% LVR loan.
- Stand-alone: You release equity as cash with a loan top-up on the property you own.
- Reverse Mortgage / Home Equity Release: Borrowing money against your owner-occupied property, if you've paid off all, or most of, your mortgage. The loan doesn't need to be paid back until your house is sold, usually after you die.
- Home reversion and home buy-back schemes: Under these schemes you sell all, or part of, your home to someone else (usually a bank or other financial service provider), with the right to live in the property.
Access your equity
Equity, it’s complicated and somewhat misunderstood. Remember, everyone’s financial situation is different and every lending provider has different criteria, so make sure you contact your trusted provider or mortgage advisor to find out your position.