That Home Loan Hub
Welcome to That Home Loan Hub, your ultimate guide to mastering the world of home loans and property. I'm Zebunisso Alimova, here to simplify the complexities of real estate and provide you with expert insights and the latest trends.
Whether you're a first-time homebuyer, an experienced investor, or simply curious about the property market, this podcast is for you. Join me each week as we unlock the secrets to property success and help you make informed decisions. Let's dive into the world of property together!
That Home Loan Hub
Breaking Down the Numbers: How Much You Really Need to Buy Property #2
Dreaming of that second property purchase but unsure if your numbers add up? Our candid conversation tackles the often misunderstood relationship between property equity and income requirements that determines your true buying power.
Through a practical example based in Waikanae, we dissect the crucial difference between perceived equity and usable equity – a distinction that catches many property owners by surprise. While that $400,000 in property equity might look impressive on paper, we reveal why banks might only consider $190,000 of it usable for your next purchase, and how this dramatically affects your options.
Diving into the mathematics of mortgage servicing, we explore the five-times income rule that banks typically apply and demonstrate how rental income factors into your borrowing capacity (spoiler: it's not as straightforward as you might hope). For our example client with $80,000 income and a desire to purchase a $950,000 property while retaining their existing home as an investment, we calculate exactly what income level would be required to make this dream a reality.
Whether you're asset-rich but cash-poor, or simply trying to understand what's realistically achievable with your current financial position, this episode provides the clarity needed to set meaningful medium-term property goals. Ready to understand your true property purchasing power? Listen now and transform how you think about equity, income, and strategic property planning.
Hello and welcome back to James Shears. Hello, James.
Speaker 2:Bonjour.
Speaker 1:Oh, that's a new one.
Speaker 2:I'm trying different things.
Speaker 1:Awesome, James. What have we got today?
Speaker 2:Well, today I'd really like to talk about setting financial goals. That's awesome, so I thought the best way to do that is I'm going to be a prospective client. Okay, we'll have a look at my financial situation and I'm looking to get some advice from you about a property I would like to buy and what I might need to do, because my current situation might not be ideal.
Speaker 1:All right, sounds good. And, guys, remember, this is not a financial advice specifically for you, but just an example of what can happen in a conversation. When a client does come to us, go ahead, james.
Speaker 2:Okay, loosely based on my financial situation, but not real numbers. Okay, so let's talk about financial goals. Financial goals can be short, medium or long-term. What we tend to look at is the more medium to long-term goals, which is two years to medium term. Medium would be two years, long would be five, plus what I want to do. We already have an existing property, but I'd really love to buy a property here in Waikanae, and so I'd like to ask Zeveniso about what I need to do to be able to get into that second property.
Speaker 1:Awesome Sure away.
Speaker 2:Okay, so we have one existing property. We have about $400,000 equity in it. I owe about $300,000 on it. We only have one income at the moment, which is around about $80,000. So we are cash poor.
Speaker 1:Asset rich.
Speaker 2:Asset rich, I think you would say, I'd like to say asset rich, but you know, let's go cash, poor Asset rich. I think you would say Well, I'd like to say asset rich, but let's go cash poor. So what do you think I need to do to get my income up? What sort of income would I need to get that property and why can't I?
Speaker 1:Okay, well, first of all, you really need to start educating yourself on equity that we can actually use for the bank. And this is the trap where a lot of people fall into, because just before you said your property worth is about 700K and you've got 400K equity with the mortgage of 300. However, if you sold today, sure, you've got that 400K cash left on hand. However, for the bank, when we assess the equity available to you to use, we can only go up to 70% LVR if it's an investment property, or up to 80% LVR if it's your own occupied property. So, for instance, in your case of 700K property, we do need to. Are you going to be living in it or you're going to leave it as an investment property?
Speaker 2:That's a very good question. My preference is, since I love coming to Waikano, I think it might be quite cool to just come and live in Waikano.
Speaker 1:Lovely. So let's pretend your 700k property is going to remain as your investment property and eventually your kids may return to their roots, so you need at least 30% equity remaining in that before we can use anything else. So that leaves me available loanable value to you 490. 490 minus 300K mortgage, you only have 190K as your deposit for your next property, right. So 190K equity Right for your next property and that's going to be your 20% deposit. Because it's your 20% deposit, you can actually buy a property up to $950,000.
Speaker 2:All right.
Speaker 1:So this is just based on equity, only purely on equity. Now, income-wise, let's look into the income. So you asked me what should be your goals. The rule of thumb at the moment is five times of your income is how much you can borrow. So, in overall, if you are needing to borrow 950K plus 300K existing mortgage, that's 1.25 million. If we divide it by five, you need an income of about 250K. Okay.
Speaker 2:I've got a bit of work to do in that area.
Speaker 1:But remember the rental income can also be included in that scenario. So, for instance, your other property can stay as a rental property and you could potentially have $700 per week. And if we take 700 times by 52, we get $36,000 a year.
Speaker 2:Okay.
Speaker 1:Now, it does get shaded by the banks. Remember that as well. So it does get shaded by the banks, remember that as well. So it does get shaded by about 25 percent.
Speaker 2:So we can potentially use 27k and why does the bank pay that amount?
Speaker 1:um, this is just to allow for things like when you don't have enough, um, uh, when you don't have tenants in it, yeah, for instance, and there is periods of time of time when the property is empty, or if there is any maintenance to do, and also if any other potential cost arises. So that's where we can use the full amount of all property management fees as well. So that's where it gets shaded. So, if you think about it, 250k minus 27,000, you're looking at 222,700. So you need to be earning at least $220,000.
Speaker 2:I can get Rebecca to earn that amount of money.
Speaker 1:Yeah, I reckon I think Rebecca will be all for it.
Speaker 2:Yeah, absolutely, if we get to Wai Kanae.
Speaker 1:Yeah, she can work another two jobs right.
Speaker 2:Absolutely.
Speaker 1:Well, james, so the goals are for you really is equity. You've nailed it. You've got enough equity there for you to buy something decent in Waikanae. But income is an area for you guys to work in and maybe get you know two solid jobs 100K each Yep and rent out your property in Manawa too, and you're ready to go.
Speaker 2:Oh, we've got options. Sounds like I've got some good long-term or medium-term goals. Really Say one to five years. Won't be happening this year, maybe next year, Maybe next year or the year after.
Speaker 1:Absolutely. So, for those that are listening, if you do want us to have a look at your goals, reach out to me and James. Now that he knows how to work out the goals and equities, he will be more than happy to share his knowledge. Absolutely. Thank you, james.