Question about loans against equity

So I'm trying to wrap my head around this whole equity thing, here's what I know;
1) Equity is the value of the house that you currently own, I get that.
2) You can get loans from the bank using your equity as security.

My knowledge gap;
1) When I am a first home buyer, I have no equity, no security, just my cashflow from my job, but I can secure a home loan, no drama.
2) When I DO have a home, and have equity, and I get a loan against it, how does the equity/security differ from just getting a loan with no security/property?

Example;
I own a $400,000 property outright.
I need $50,000.
I get a loan from the bank using 50K of equity.
I know own only 450K worth of my house, but I now have $50K to spend/invest

My question:
Do I still need to pay off that 50K loan? Or have I just traded part ownership of my house to the bank, for money/liquidity?

If I do need to pay them back, then that implies I have enough cashflow to service the loan, which then implies I wouldn't need to use equity as security because I can already service the loan without equity!!

I'm so confused by it. Do I need to pay off equity loans or not?
 
1. No.
Equity is the different between the value of the property and the loans against it.

2. No
You can only use property as security, not equity.

1. You will use the property being purchased as security
2. When you have a property with a loan against it you have already used that property as security. If you have sufficient equity you can get a new loan, additional, against the same property.

Of course you need to pay off any loan you borrow.

You are confused by you thinking about ?equity?. Just think about property and loans instead.
 
I've commented in red. My answers are super basic and make asumptions, but hopefully it makes sense and get get you started.
I
My knowledge gap;
1) When I am a first home buyer, I have no equity, no security, just my cashflow from my job, but I can secure a home loan, no drama.
Incorrect, the home you are buying is the security. Also, banks don't like to lend the full amount of the value ofthe security. This is where Loan-value ratio (LVR) and deposits come in. As a general rule, you can borrow up to 90ish% but will pay a fee to borrow over 80%
2) When I DO have a home, and have equity, and I get a loan against it, how does the equity/security differ from just getting a loan with no security/property?

Example;
I own a $400,000 property outright.
I need $50,000.
I get a loan from the bank using 50K of equity.
I know own only 450K [350k - typo?]worth of my house, but I now have $50K to spend/invest

My question:
Do I still need to pay off that 50K loan? Or have I just traded part ownership of my house to the bank, for money/liquidity?

Of course you have to pay it off, they have loaned you cash, using a mortgage on your property as security. This will usually be exactly like any other mortgage.

If I do need to pay them back, then that implies I have enough cashflow to service the loan, which then implies I wouldn't need to use equity as security because I can already service the loan without equity!!

Servicablity is not the only criteria, banks also require security. The theoretical $50k you borrowed against your original property acts as a deposit for the second property. (Because of that LVR thing I mentioned above)

Property 1
Value - $400k
Loan - $50k
LVR - 12.5%

Property 2
Value - $400k
Loan - $350k
LVR - 87.5%

Total Loans - $400k (ie, how much you have to pay off.)

There's a lot more to it than this, but hopefully will get you started.


I'm so confused by it. Do I need to pay off equity loans or not?
 
Perhaps the question relates to secured or unsecured loans.
Unsecured loans, mostly personal loans and credit cards are based on income and repayment capacity and as there is no security base, risk is perceived to be higher and so are the interest rates.
Secured loans on which a security is given (such as a home loan or a car loan) risk is perceived to be lower as are the interest rates. Irrespective, they are loans that the lender will want to be repaid for.

In your example of borrowing $50k using your property as security (lender takes possession of title but not ownership) and based on your capacity to service the loan, the lender will advance you $50k as a loan. The loan terms are determined by you within their policies. Generally 30 year terms P&I. You need to repay the loan over the borrowing period. There are some interest capitalising LOC facilities available but once the borrowing limit is reached, repayment is required.

In the seniors space, there is a provider who offers a deferred real estate sale option where they do take a future ownership position in return for immediate funds. Likewise there are reverse mortgages for seniors that do not require repayment in the life of the loan, until sale,death etc. but I do not think this is what you are referring to.

I hope that helps.
 
1. No.

1. You will use the property being purchased as security
2. When you have a property with a loan against it you have already used that property as security. If you have sufficient equity you can get a new loan, additional, against the same property.

Of course you need to pay off any loan you borrow.

You are confused by you thinking about ?equity?. Just think about property and loans instead.

Thank you!

I was not realising that the home initially IS the security.

Also yes the $450K was a typo, was meant to be $350K.
 
Just on your first point "I can secure a loan no worries", without equity or a guarantor (family member using there home as the security) then you will need to come up with a deposit of atleast 5% plus costs.
So for example if you purchase a $500,000 property the deposit will be 25k plus stamp duty and other costs meaning about 45k. You then need to consider LMI but I will not throw that confusion in the mix for now.

Point being doesn't matter if you earn 1 million dollars a year, if you do not have a deposit as mentioned above or a security then you also cannot get a loan. The risk being to the banks how can someone earning 1 million dollars have no money? Gambler, drugs?
 
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