Calculating equity
Question from Nathan updated on 30th September 2019:
My owner occupier house is worth $500,000 and my rental property is worth $400,000. I owe $600,000 to my bank. How do I calculate how much the bank would lend me for a) a second rental house (to rent) and b) a third house to live in (i.e. if the current occupier house becomes second rental)? My mortgage broker has confused me about this.
Our expert Kris Pedersen responded:
Firstly, note that there will be other criteria outside of your equity position that you will also need to satisfy. But, based on the information that you have provided, you have $80,000 of unutilised equity when looking at bank criteria (and non-bank options may enable you to push further).
The way to look at this - from a bank point of view - is as follows: Your personal home can be leveraged to 80% which is $400,000 and your rental property can be leveraged to 70% which is $280,000. These figures combined are $680,000 which, when you take the $600,000 total mortgage figure away, leaves $80,000 which you can use for further deposit funds.
If you were to purchase another rental this would give you a maximum purchase price of $267,000. To calculate this, you take the $80,000, then divide by three and times by 10 which shows you how much the $80,000 as a deposit will give you.
I presume you have both of your existing properties with the same bank. If this is the case, if you look to purchase a new property they are going to assess both of your existing properties at 70% of their combined values or $630,000. This would only leave you a $30,000 deposit for the purchase of a new home. But if they are currently with different banks there may be other options. Feel free to get in touch to discuss further.
Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz
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