‘Deposit’ is the word a lot of people use, but it can be a confusing because it can mean two different things. First, when it comes time to buy your property, you will need to pay a 10% deposit as part of the Contract of Sale. Next, a lender will expect you to have a deposit before as part of getting a loan. What deposit are we talking about?
That is why I like to bundle everything in together and call it ‘contribution’. It is your equity, your savings, maybe a gift from your parents.
If you were buying your first home, we would be focusing on your savings. But for upgraders, the key to moving on to a better home is generally your equity so I am going to spend some time
Equity
Equity is the value of your current property minus your outstanding mortgage.
There are two ways you can access your equity:
- Sell your home.
- Keep your home and borrow against the value.
1. Selling your home
This is the simplest way to access your equity. Your equity is whatever is left over after you’ve sold the home, paid the sales costs and paid out the mortgage. Even if these sound like it could be expensive, it is the way to access more of your equity and there are no strings.
The reason I say this is because you can get the most money, and you can get it in cash.
To illustrate the point, let’s imagine you sold your current home for $600,000. We will assume your sales costs were $18,700 – real estate agent’s fee of $13,200 (based on 2.2% commission), marketing costs of $3,000 and conveyancing costs of $2,500. And let’s assume your outstanding home loan is $300,000. In that case, your available equity would be $281,300.
Want to understand how much your home is worth? Click here to find out.
2. Keeping your home and borrowing against the value
If you keep your current home, you can’t access your equity in cash – you can access it only by borrowing.
Lets look at how you would do this as the separate components:
- Your current loan on your current property (which would switch to an investment loan)
- An Equity Loan where you borrow against your current home, access the equity to use to fund the deposit on your new property.
- A new mortgage on your new property (which would cover the rest of the property purchase).
Remember, the property was valued at $600,000, which means 80% of the property’s value would be $480,000. There was $300,000 left on the mortgage, which means the available equity would be $180,000.
NEED IMAGE HERE
In this example the $180,000 is your “Equity Loan” and this is then funds avaliable to purchase the new home.
Yes, it is possible to borrow up to 90% of the value of your home, in this case we then need to factor in the Lenders Mortgage Insurance (LMI) fee into the equation.
Summary:
You can see that if you sell your home, you have a contribution of $281,300
If you keep your home, you only have access a contribution of $180,000
The difference of $100,000 can have a significant impact on the home you can afford.
Should you keep your current home when you upgrade? Click here to see the pros and cons.