An introduction to LVRs (Loan to Value Ratios)

For some of you the first question to this heading might be “What is an LVR?”

An LVR otherwise known as a Loan to Value Ratio provides the bank with a threshold to the amount of debt they can lend you vs the value of what the property is worth.

Why is this important?

This is done to protect the banks by having a buffer in the event property prices decrease. The banks are not looking to give you a mortgage on a property that’s now worth less than the actual loan.

How do I know what my LVR is?

The rule is Loan/Value = LVR %

Say you’re looking to buy a property that is $500,000 and you have a $100,000 deposit. The loan you will be needing from the bank is $400,000.

$400,000 (Loan) / $500,000 (Purchase Price) = 80% LVR

How does this affect you as a first home buyer?

Generally if you’re applying for lending as a first home buyer some of the major banks (ASB, ANZ, TSB etc) are now willing to lend you up to 95% of the value or purchase price of the property.

This means if the property is $500,000, 95% lending on the purchase price is $475,000. The remaining $25,000 must come from a deposit or gift.

But I thought I needed a 20% deposit to buy my first home?

20% is the ideal deposit for most major banks. A deposit of this allows you to negotiate for the best interest rates & receive the best cash incentives vs someone that only has 10% deposit may face higher interest rates via an LEP (Low equity premium), additional fees and receive little to no cash incentive for taking out a mortgage.

What if I’m looking to purchase my first investment property?

As an investor with a major bank the bank will generally lend you up to 70% of the purchase price. The remaining 30% must either come from a deposit or equity on another property.

If you already own your own home and the value has gone up you might find that you’ve made a bit of equity. You will be able to borrow up to 80% of the value of your family home to use towards your 30% deposit on a rental

For example, say you bought a home in 2016 for $500,000 and the value in 2019 is now $600,000. Your mortgage is currently $350,000 on the property.

80% of $600,000 (Today’s Value) is $480,000 (80% of Today’s Value) – $350,000 (Your Mortgage Debt).

This leaves you with accessible equity of $130,000 to use towards a 30% deposit on a rental property priced circa $433,000 via a major bank.

Please keep in mind that you must also meet the banks serviceability & lending criteria to be able to access this equity.

Thanks for reading everyone

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