As a new property investor, you must understand what is ‘equity’ is. Equity is how much of your property you actually own.
To calculate your equity, simply identify the current value of your property and minus the loan balance and any outstanding debts. If the amount is negative, this means your property is worth less than the mortgage borrowed. If, however, the amount is positive, this means the value of your property is worth more than the mortgage debt you owe.
Equity growth fluctuates with the economy and housing demand. More housing demand increases your equity. Whereas, recessions reduce the value of your property, decreasing your equity.
As an investor, you should accumulate positive equity. This can be done by not selling your property. The longer you keep your property, the more it will increase in value. With positive equity, you can remortgage to buy more investment properties without using cash in the bank. This is how I have grown my property portfolio.
How to calculate your equity
Let’s say, in 2015 I purchased an apartment for £100,000 with a £90,000 loan from the bank. In 2018, this apartment is now worth £200,000, but the loan has reduced from £90,000 to £85,000. There are no additional debts against the property. This means my equity is £115,000 (£200,000 – £85,000) or 43% (£85,000 / £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 is 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 the LTV was higher than 75%. If your LTV is too high, lender think you have too much debt.
How to remortgage using your equity
Remortgaging your property using equity is not difficult. Apply directly with a lender or a mortgage broker. An assessment of your financial eligibility and a valuation of your property will be conducted to determine if you have enough positive equity. If approved, the fund will be transferred into your nominated bank account.
After approval, you choose the date of when to receive the fund, but, this often has to be within a six month validity period.
Some investors prefer to receive their fund immediately. I prefer to receive the fund a day before the exchange of contracts (when buying a new property). This is because you start paying interest from the day the money enters your bank account.
So, how do you grow your property portfolio?
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