# How to release equity in my PPOR



## kerosam (22 September 2005)

I'm contemplating to get my house (PPOR) valued to borrow some money for 2nd property (not sure IP or PPOR, does it matter anyway?).

Spoke to the developer of the land and the same size blocks are now selling for about $95k (i bought mine for $72k, up $23k) and as from the builder, due to increase in cost of materials and labour, the house that cost me $202k to built is now about $240k (up $38k).

My loan with the bank is still $250k. But my question is, should i get a valuation for the property and then ask the bank to release that $23k plus $38k. Is that how equity works?

Or is it better not to use PPOR as a collateral (if that is the correct word) for IPs?


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## mime (22 September 2005)

Hey. Is a mortgage and equity the same thing?


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## kerosam (22 September 2005)

not too sure but i always thought mortgage is how much the borrower owes the bank while equity is the difference between the current value of the asset and the initial cost of the asset.

my mortgage would be $250k but my equity could be the present value of the house say $300k minus the $250k, so $50k equity. I could be bloody damn wrong.

any support or correction would be appreciated.


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## GreatPig (22 September 2005)

kerosam said:
			
		

> not sure IP or PPOR, does it matter anyway?



If you mean to _buy_ a new IP or PPOR, then it matters in terms of deductibility of the loan interest. If you buy a new PPOR, then the loan interest will not be deductible.




> ask the bank to release that $23k plus $38k



Are you saying the house would now cost you an extra $38K to replace? If so, that's not increased equity, as it's not the new value of your current house. The actual house you built for $202K would probably be worth less than that now - depending on what you've done to it since then.

I've never done this myself, but I think the idea is that you'd get your property valued, which would be its current market value for the whole thing (land plus house), and that would determine how much extra equity you have - its value above the current loan amount. If that's less than the maximum LVR the lender allows, then you might be able to borrow against the surplus equity up to the maximum LVR. It will depend on serviceability as well though.




> Or is it better not to use PPOR as a collateral (if that is the correct word) for IPs?



I think that's a matter of personal preference. Some might prefer not to risk their PPOR in this way, but others might prefer it as it might allow them to borrow more and at the same time provide some asset protection to the house (by having a secured loan against it). Robert Kiyosaki will tell you that a home is a liability rather than an asset, as it continues to cost you money but the costs aren't deductible and there's no income, so that money isn't working for you.

So it depends on what risk level you're comfortable with. If you mortgage the home for an investment and the investment goes belly-up for some reason, then you could lose the home.

Cheers,
GP


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## tech/a (23 September 2005)

kero.

First thing to do is get a good Mortgage Broker.
One who has access to many institutions.

He will need to know how much you need and it will be his job to find a lender if you qualify.

You need to know the equity in your PPOR.
Equity is the difference in your purchase price and the price you would get for the property now.
So payed $200,000 now worth $250,000 equity $50,000.

Banks will require equity or a cash deposit of 20% some less but the best deals will come from 20% deposits.Lodoc loans will go from 15-5% but interest will be more.
$50K equity will generally qualify you for $250K
You dont come up with any $$s the bank takes security over both your PPOR and IP and pays the lot.

The next thing they will look at is serviceability.
They will use a what if situation of 70% occupancy on the IP interest at 2% higher than today V your income plus anyone else on the Mortgage.
Lodoc loans wont be as stringent---but personally if you'd struggle with this then I'd be pretty reluctant to do the deal!
Dont over stretch yourself---you must feel comfortable---particularly in these times.

Next find a VERY GOOD accountant---they are well worth the $$s.
Seek out one who is right up on property and Share investment--H&R Block dont come close!
If you make your PPOR your rental and move to the new one--all tax benifits will be available then on the rental(Your old PPOR).If new depreciation is also applicable.

By using your equity you are unlocking your profit without selling your property--the bank gives it to you in return for their interest.
Ideally you want the properties to rise as well as recieving your income from the rent.
If you are over geared 80%+ then seriously consider using the equity elsewhere,share portfolio's are an example.
An accountant will run through your risk exposure and your capacity to service.
The tax benifits can turn a negatively geared senario into a positive--but thats beyond my expertise!

Know your situation and gear for the worst case.

The aim is to eventually freehold as many properties as you can or at least be positively geared with major equity in each.While freeholding your PPOR may not be possible when initially getting going it should be an aim to freehold.


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## kerosam (23 September 2005)

tech/a and GP, thanks for the input.

will try to make appt with accountant and mortgage broker asap.

i guess i should get the lender's valuer to do their stuff before the lender can tell me how much i have in equity right?

my shares portfolio are mostly high risk stocks... will that matter?


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## mime (23 September 2005)

Wait so s equity a nice way to say mortgage?


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## AnUbIs (23 September 2005)

Do you really believe it’s a good move right now, with the price of gas? Who knows how long this will last and how this could effect the economy. I’d be waiting to see how things pan out!


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## kerosam (23 September 2005)

don't you worry about your english.... i didn't pass a single english major paper until the real major exam, the "A" levels and i got a C6. anything lower is a fail which would mean a fail in my overall "A" levels.

from how i read off tech/a's and GP's thread, i think equity is the present value of the asset minus your initial cost (which is the mortgage for property). the present value will need to be determined by a valuer and your cost would be the mortgage (whatever that is left off it). please shoot me if i'm wrong, someone.


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## ghotib (24 September 2005)

There's a useful website at www.dictionary.com, which provides at least a starting point for working out the meaning of even technical words.

Equity in a property is the value of the property less any liabilities against it. So shareholders' equity in a public company is the value of the company's assets less the value of its liabilities, and Kerosam's equity in his home is its current value less the current value of the mortgage. 

So equity in your home is not the same as mortgage. It's the part of the value of your home after you subtract the mortgage. And a bank can't "release equity" in your home - it's your equity, not theirs. What they are doing is accepting your equity as security for a loan to you: all the "release the value" and "equity mate" stuff is sales talk. The product the banks are selling might be very useful to you, but be very sure you understand what it is before you sign on. 

I strenuously agree that you should find a good accountant before you commit yourself to a loan for any kind of investment, but particularly an equity loan to buy property because the amounts tend to be large and a mistake could cost you thousands in tax and be very difficult to fix - don't ask me how I know. The ATO website is a very good place to start your own research and I think you can get a pretty good idea of what you need to be able to demonstrate to them, but it's no substitute for professional advice on your own circumstances.

Kero, you sound like you're still fairly close to the beginning of figuring out how to move into property investment? I think it would be smart to keep open the possibility of waiting till you've paid off more of the mortgage and have more equity in your home to play with. If the value of your home falls, it's your equity that drops, not the balance of your loans, and it's a lot harder to sell your home and find a new one than it is to sell a parcel of non-performing shares. 

And all that might be completely irrelevant to your situation, so of course it's not advice.

Good luck,

Ghoti


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## GreatPig (24 September 2005)

kerosam said:
			
		

> my shares portfolio are mostly high risk stocks... will that matter?



That probably depends on what bearing the portfolio has on the property transaction and whether or not it's leveraged.

If the portfolio is just extra money, where you're not trying to use it as security for the property, and it's not geared, then I don't think it should matter at all (although we are talking about banks here ). The worst that could happen is you could lose the lot, which would have no bearing on the property. If it's geared though, that's another story.




			
				mime said:
			
		

> so s equity a nice way to say mortgage?



Perhaps the easiest way to think of equity is this: if you sold the property right now, the amount of cash you'd have left after paying off the mortgage is your equity.

GP


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