Property investment tip 6: Why equity is important for growing your property portfolio quickly

‘Equity’ is one of the most important word you’ll learn as a new property investor. Equity is the current value of your property minus your mortgage payments.

In simpler terms, if you sell your property today, it’s how much money you’ll take home after the mortgage, fees and any additional debts have been paid.

Equity can help you grow your property investment portfolio without you having to use any, or only a small amount of your personal savings. I’ve only paid a large deposit from my cash savings for my first properties in Australia and the UK.

Thereafter, I used the equity from the capital growth of my existing properties (as opposed to my cash savings) to purchase a new property every three to four years. You can easily do the same.

Equity growth is influenced by external factors such as the economy, housing demand, population growth, employment rates, etc. Housing demand booms can significantly increase your equity whilst recessions can reduce the current value of your property to lower than what you originally paid.

Remember, you don’t have equity if the current value of your property decreases or stays the same.

How to calculate your equity and loan-to-value ratio

As an example, let’s say in 2014 I purchased an apartment for £100,000 with a £90,000 loan from the bank. In 2017, this apartment is now worth £200,000 but the loan has reduced from £90,000 to £85,000. I also have no additional debts against the property. This means my equity is £115,000 or 58% (£115,000 / £200,000 x 100).

Another way to calculate your equity is by using the loan-to-value ratio, or LTV. It’s calculated by dividing the remaining loan balance by the current market value. So using the above property as an example, my LTV would be 43% (£85,000 / £200,000 x 100).

LTV is often the preferred risk assessment formula used by banks. From my past experiences, most banks would not lend us more money if our LTV was higher than 75%. Check with your lender to find out their LTV limit.

According to many lenders, if your LTV is too high, this means you may have too much debt and may not be able to make the interest repayments.

How to apply for equity (more money to invest)

The process of applying for equity (more money to invest) is simple; you can apply directly with the lender or a mortgage broker. An assessment of your financial eligibility and a current valuation of your property will be conducted. If approved, the funds will be transferred into your nominated bank account.

After approval, you choose when you receive the new funds but this usually has to be within a six month period – check the deadline with your lender. Some people prefer to receive the funds immediately. I prefer to receive the funds just before the exchange of contracts (when buying a new property) because interest is owed the day you receive the funds. Best to delay paying interest, if possible.

Experts will give you a set time of when your equity should grow – obviously the sooner, the better – but I don’t think you should be too concerned. I believe if you don’t sell your property until you retire, as discussed in my previous post, then generally your equity should steadily grow with your long-term capital gain.

Please note, though I own a few properties, I am not a legal, financial or professional property expert. I’ve written this post to share my personal experiences and would love to hear your opinions and views.

So, how have you used equity to grow your property portfolio?

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