Can anyone help me understand what "equity" means?

Any general questions you might have in regards to loans and finance.
gleeson
Posts: 58
Joined: Mon Jun 15, 2009 12:15 pm

Can anyone help me understand what "equity" means?

Postby gleeson » Wed Sep 24, 2014 3:05 pm

Hello,

My friends told me that this forum is very helpful and so I’m here to test it out. I’ve heard and vaguely read about equity but I’m not sure what it means. Can anyone please help me understand this?

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Otto Dargan
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Re: Can anyone help me understand what "equity" means?

Postby Otto Dargan » Thu Sep 25, 2014 8:01 am

Hello gleeson and welcome to the forums.

The difference between the property value and the loan amount on the property is known as equity. To put it simply, if you owe $250,000 on a house that you have purchased for $350,000 then your equity on the house is $100,000.

The equity in your home is usually the biggest asset you may have. People normally aim to repay their home loan before retirement. If you have little equity in your property when you retire then you may be forced to either downsize your home or continue working to repay the debt.

With a home equity loan, you may be able to access your equity. This may be subject to equity release restrictions, also known as cash out restrictions. You may then use the released funds for any worthwhile purpose including renovating your home, investing in property, or consolidating debts.

This is why it is beneficial to try and minimise unnecessary spending and try to pay off your home loan as soon as possible. This may also decrease the interest that you pay and save you money as well as increase your equity.

Cheers,
Otto
Otto Dargan
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gleeson
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Joined: Mon Jun 15, 2009 12:15 pm

Re: Can anyone help me understand what "equity" means?

Postby gleeson » Thu Sep 25, 2014 3:15 pm

So it seems like my friends pointed me towards the right direction. Here's a concise overview of my situation -

The market value of my parents’ house in Adelaide is about $600,000 and they still owe $350,000 on the house. I’ve heard that banks can allow me to purchase the property at a price lower than the market value. Can you tell me the advantages of buying below market value, and other things related to such a purchase?

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Otto Dargan
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Re: Can anyone help me understand what "equity" means?

Postby Otto Dargan » Fri Sep 26, 2014 9:20 am

Hi gleeson,

If you buy your parents’ house below market value then it is known as a favourable purchase. Aside from getting to purchase below the market value, there are several other benefits of a favourable purchase like:
  • You get instant equity - You will have more equity if the purchase price is lower in comparison to the market value. The more equity you have, the more you may be able to release for investment purposes.
  • You may avoid paying LMI - If you are not borrowing more than 80% of the property value then it is possible that you may not have to pay LMI.
  • No requirement of a real estate agent - Without hiring a real estate agent, you may be able to save your parents even more money.
  • You put money into your parents’ pocket - As you will be paying off the mortgage for your parents, you will be enabling them to save more.
  • No Contract of Sale is required - Although you do not need a Contract of Sale, it is advisable to talk to a solicitor about this.
  • You can avoid a gift tax - If you were simply inheriting the property as a gift then you must pay a gift tax.
  • No need of a second security - If you take out a guarantor mortgage then a second security may be needed. However, there is no need for one in case of a favourable purchase.

You can check out more about this on our website. If you want to discuss your situation with one of our experts then you can call us on 1300 889 743 or you can enquire online.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

gleeson
Posts: 58
Joined: Mon Jun 15, 2009 12:15 pm

Re: Can anyone help me understand what "equity" means?

Postby gleeson » Sat Sep 27, 2014 12:05 pm

I didn’t expect such quick and precise responses. Thanks a lot for helping me learn all of this. I’m convinced you guys know what you’re talking about. I’m planning on calling you by the end of the coming week.

Cheers :)

Anna90
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Joined: Sat Aug 03, 2013 9:35 pm

Re: Can anyone help me understand what "equity" means?

Postby Anna90 » Fri Nov 21, 2014 1:03 pm

Hi. While going through this thread, I was intrigued by a “favourable purchase.” Will I be able to get a favourable purchase from someone other than my parents? I also want to know how much I can borrow.

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Otto Dargan
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Re: Can anyone help me understand what "equity" means?

Postby Otto Dargan » Fri Nov 21, 2014 2:56 pm

Hi Anna90,

It may be possible for you to make a favourable purchase from someone other than your parents. Every lender has their own policy on favourable purchase home loans so it is recommend you engage a mortgage broker who has experience in favourable purchases.

For a favourable purchase, you may be able to borrow up to:
  • 90% of the property value without the requirement of any genuine savings.
  • 95% of the property value with at least 5% in genuine savings. It should be noted that Lenders mortgage insurance (LMI) will also apply.
  • 105% of the purchase price from some specialist mortgage brokers. You may be able to borrow the full property value as well as the associated costs such as stamp duty and other fees.
For more details, you can have a look at our website.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Anna90
Posts: 51
Joined: Sat Aug 03, 2013 9:35 pm

Re: Can anyone help me understand what "equity" means?

Postby Anna90 » Fri Nov 21, 2014 7:38 pm

Thanks a lot for the info. I’ll have a look at your website for now and if I need to learn more then I’ll give you a call. Have a good day.


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