Why is it a good time to release equity now in Sydney & Melbourne? Or how to get your family onto a good foundation to start investing in properties?
If you have a house in Sydney or Melbourne and are considering purchasing an investment property, now is a good time to start preparing yourself and your family for the journey.
There are 2 critical components for purchasing a property:
1/ Your income (which determines your serviceability), and
2/ Available funds. Incomes tend to remain stable (less affected by property market). The available funds can be greatly affected by the property market. Here's why:
You could save up for a deposit (may not be the best approach), or use the equity in your existing property (preferred for various reasons).
Releasing equity from your existing property largely depends on the current condition of the property market. Right now, in most parts of the Sydney property market, we are at its peak (some areas have passed their peaks), i.e. the best price vendors can achieve is now. Let’s look an example here:
Tom and Jan are a married couple with 2 kids, they bought their house 6 years ago for $500,000. Now their house worth around $1,000,000. Tom and Jan feel they need to do something for their financial future, they have decided to buy an investment property. They have stable jobs with good incomes. However, with family commitments and all other expenses, they don’t have a big savings account to pay the deposit for their next property.
Using the equity from their existing house, here is how it works:
Tom and Jan can refinance with their existing bank or a different bank to top up the loan:
$1,000,000 * 80% = $800,000, then take away the existing mortgage $500,000, so they will have $300,000
(= $800,000 - $500,000) available cash to use for next one or two purchases.
However, there are 2 valuation concepts that need to be clarified, market value and bank valuation. Market value, generally speaking, is the price buyers are willing to pay to purchase a particular property at a given time. The bank valuation is the value that the bank valuer thinks the property worth (generally a conservative figure). Banks only use their valuation figure to determine how much equity they want release (NOT the market value). Let’s relook at the above example:
If a bank values Tom & Jan ‘s house at $900,000, Tom & Jan now can take out $220,000 (=$900,000 * 0.8 - $500,000). That is about $80, 000 differences from the previous scenario.
Bank valuations tends to be conservative in most cases, and when market peaks or declines, the valuations are even more conservative. It won’t be a surprise if the above scenario happens in real life, i.e. a few weeks valuation delay can reduce the available funds/cash by $100,000.
So when you are planning investing and with a property you could tap into, act fast.