"Unlocking Equity"

[johnpendles]

Hi Guys,

I was hoping to get an answer to question that I can't seem to get my head around myself.

It's in regards to this concept of extracting equity from property. I understand the concept and I keep reading it on this forum but I want to make sure i'm not missing anything.

My understanding: You have a house with a 500k mortgage on it, you get it valued and it's valued at 750k. You then have 250k equity in that particular property. You can then go to your bank and ask them to give you that 250k.

That's what i understand by "extracting equity". You can then use that money on various things such as purchasing another property etc.

What I dont quite understand is, aren't you just incurring more debt? I understand that debt is not always bad and that it can be used for leveraging purposes to buy more property etc. I feel as if extracting equity gets written as if it's free money or something.

Using the previous example, you have 500k mortgage on your original home, you take that 250k in equity and you now have 750k loan you owe the bank, if you use that equity to use as deposits on purchasing another home or two, you are then taking on further debt? Is the benefit of taking the equity so that the bank will now lend you more money whereas before they wouldnt have? If the bank wasn't willing to lend you that money previously is it a good idea to take the money now just because the bank will lend it to you? Obviously personal financial circumstances dictate the answer to that question.

I'm sure there are tons of things im missing, which is why I feel a touch confused.

 

[D.T.]

Nope they're not going to give the 250k in your example. You can top up the property to 80% of its value or 90% with lmi. This figure minus any current loans is how much the bank will 'give' you, or 'extract' as you put it.

And yes it's more debt. You now owe the bank say 600k instead of 500k, but you can use that as a deposit on more property(s). Assuming you want to grow a portfolio, at decent pace, you need to use debt to do so. You also need to choose properties that will out perform the cost of that debt.

Other alternative is you save up that 100k from your wage but that takes to long and avoids the purpose of a high leverage asset class.

So... It comes down to a simple "what do you want to achieve? And by when?"

 

[Terry_w]

Hi Guys,

I was hoping to get an answer to question that I can't seem to get my head around myself.

It's in regards to this concept of extracting equity from property. I understand the concept and I keep reading it on this forum but I want to make sure i'm not missing anything.

My understanding: You have a house with a 500k mortgage on it, you get it valued and it's valued at 750k. You then have 250k equity in that particular property. You can then go to your bank and ask them to give you that 250k.

That's what i understand by "extracting equity". You can then use that money on various things such as purchasing another property etc.

What I dont quite understand is, aren't you just incurring more debt? I understand that debt is not always bad and that it can be used for leveraging purposes to buy more property etc. I feel as if extracting equity gets written as if it's free money or something.

Using the previous example, you have 500k mortgage on your original home, you take that 250k in equity and you now have 750k loan you owe the bank, if you use that equity to use as deposits on purchasing another home or two, you are then taking on further debt? Is the benefit of taking the equity so that the bank will now lend you more money whereas before they wouldnt have? If the bank wasn't willing to lend you that money previously is it a good idea to take the money now just because the bank will lend it to you? Obviously personal financial circumstances dictate the answer to that question.

I'm sure there are tons of things im missing, which is why I feel a touch confused.

"extracting equity" is borrowing money. Ie taking on more debt.

 

[ZachAnSel]

Johnpendles, you must be generation that think "steer away from debt".

However you know that debt is not always bad.
For me as long as for purchase growth asset, someone else pay for it, tax favour, and lose value over time. I dont mind adding more debt, at the end of the days its just number for me.

I remember one of the quote, whats the point having good debt if you have to paid off.

 

[Jamie M]

My understanding: You have a house with a 500k mortgage on it, you get it valued and it's valued at 750k. You then have 250k equity in that particular property. You can then go to your bank and ask them to give you that 250k.

Hi John

There's "actual" equity and "accessible" equity - the first is the difference between your properties value and loan amount. The second is what the bank will actually lend you - and it's usually up to 80% of the properties value minus your current loan amount (sometimes 90% depending on the lenders policy).

Cheers

Jamie

 

[johnpendles]

Thanks guys.

 

[johnpendles]

Johnpendles, you must be generation that think "steer away from debt".

However you know that debt is not always bad.
For me as long as for purchase growth asset, someone else pay for it, tax favour, and lose value over time. I dont mind adding more debt, at the end of the days its just number for me.

I remember one of the quote, whats the point having good debt if you have to paid off.

which generation steers away from debt?

i understand the concept of leveraging to grow wealth.

i was just wondering if there was something i was missing in the equity game etc. i think my questions have been answered. cheers.

 

[johnpendles]

You also need to choose properties that will out perform the cost of that debt.

sounds so obvious, but this is the key isn't it. things much clearer now.

 

[Ausprop]

sounds so obvious, but this is the key isn't it. things much clearer now.

always obvious in hindsight!

 

[roe]

sounds so obvious, but this is the key isn't it. things much clearer now.

and dont forget to have a backup plan, taking out equity seem like a good idea when things going up but it has the opposite affect going down.

it increase your return on the way up and it multiple your loss on the way down so have a plan to deal with it and don't get force to sell during down turn.