The magic of equity

The value of your present home can be tapped to help you climb further and faster up the property ladder

- STUART WEMYSS

Many people are at a loss when it comes to financing a property that, on paper, is negatively geared. They’re uncertain how they’ll make up the cash flow shortfall that often comes with well-located, high-capital-growth property, as opposed to a high-yielding, “pays for itself” rental investment.

On the other hand, some people never even consider starting a property investment career because they believe they simply can’t afford it. They think, “How can I possibly pay off my own home while I’m saving a deposit for another one?”

Equity equals opportunity

Equity is often overlooked when it comes to property finance. Equity is the net realisable value of a property – or how much cash you’d walk away with after you deduct sale costs, outstanding debt and capital gains tax from what the investment is currently worth.

However, there’s another definition of equity that’s relevant when you start talking about using equity as financial leverage – borrowable equity. This is essentially the property’s value multiplied by 80% (with 80% representing the amount you can generally borrow without the need for mortgage insurance), minus whatever you owe against the property. For

instance, if a property is worth, say, $500,000, you can theoretically borrow $400,000, but if you already owe $300,000 against the property, your borrowable equity will be only $100,000 – the extra amount you can borrow using the property as security.