What is LVR and why is LVR Important?
Firstly – What is LVR? LVR is an indication of the value of your investments. The acronym LVR stands for Loan to Value Ratio. It is actually a percentage of the amount of borrowed funds compared to the actual value of a property. LVR can be applied to a single property, or it can be aggregated (calculated) across the whole of an investment portfolio.
Why is LVR Important?
The LVR, or Loan to Value Ratio, is important when it comes time to borrow money for a loan. The lender will need to assess the ratio of the LVR in order to assess the risk of lending money. It is important to understand how to calculate your LVR, because the lender will certainly want to do so. The reason why LVR is important is that the lower your LVR, in general, the better your chances of getting a loan. For the property investors, the biggest secret about being a property investor is not about finding the best deals. The most important thing about property investment is getting approval for finance!
How to calculate LVR
It is relatively simple to determine how to calculate LVR for your current property. To calculate LVR, simply divide the value of the loan by the actual value of the property. The LVR can be expressed as a decimal value or converted to a percentage. So, it will be something between 0 and 100%. Theoretically speaking, if you have borrowed all of the funds to buy a property, the LVR would be 100%. On the other hand, if you own 100% of your property, your LVR would be 0. A more likely scenario might be that you wish to purchase a property for $500,000 and have saved $50,000 as a deposit. This means that you would need to borrow $450,000 to purchase the property. The LVR for this example would be 450,000 / 500,000 = 0.9 or 90% LVR.
What is the importance of LVR for getting finance approved?
The important thing to take into account when applying for finance approval is to take into account the value of the new property. There are many factors involved in purchasing a new property, and the lender will need to take all of these factors into account. For example, the valuation of the property cannot simply be assumed to be the purchase price on the contract. If the property was purchased at auction, then the price may be subject to emotional bidding rather than a true indication of the value of the property. So the lender will require an independent valuation be conducted in order to accurately judge the value of the property. The next factor is the amount of the deposit that you can afford to pay. The higher the deposit, the lower the LVR, and therefore the more likely the loan can be approved.
What is the risk associated with LVR
To put it simply, the higher the LVR, the more money is loaned against a property. The more money that is owed, the higher the risk. The other way to think about LVR is in terms of security. To a lending organisation, the level of risk to loan money is reduced by the amount of security that they hold over the mortgage. What this means is that if the owner of the property is unable to repay the mortgage, the lender may be required to sell the property to get back the borrowed funds. The property is therefore seen as the security for the borrowed funds.
When the LVR becomes high enough to be considered a high risk to the lender, they may require the borrower to take out mortgage insurance. The mortgage insurance is cover against the lending institution, but has to be paid by the borrower. Therefore the cost associated with getting finance is increased. Not only are the fees higher, but of course, there are higher mortgage repayments every month also. Don’t forget, there is always the risk that interest rates could rise in the future, and the repayments can increase.
It pays to understand your Loan to Value Ratio
It just makes good sense to understand what your Loan to Value Ratio is, and what your safe borrowing limit is. This is regardless of whether you are searching for your first property, refinancing, or upgrading your own home. Similarly, if you are searching for an investment property, it pays to understand your Loan to Value ratio. For one, the value of the LVR is important to the approval process for obtaining a loan. It is important to keep the purchase price at realistic levels to avoid an LVR that is too high. But the LVR is also important when looking for property, because if you stretch the LVR too high, there are likely to be higher fees and repayments after the purchase.
For help to work out your own Loan to Value Ratio, give Wendy de Graaf a call on 0407 447 822.