If you are looking to buy an investment property, the chances are you’ve heard of a Loan to Value Ratio (LVR).
The LVR for an investment property underpins your cash flow, the level of risk you can take and whether you have the potential to broaden your property portfolio.
What is a Loan to Value Ratio?
A Loan to Value Ratio is how lenders describe the amount you need to borrow to buy a particular property. It informs investors as to how much of a property is being financed and how much equity is available.
How are Loan to Value Ratios calculated?
To calculate the Loan to Value Ratio for an investment property, divide the loan amount by the value of the property then multiply by 100 to get a percentage. Banks and financial institutions use this as a measure of whether you can afford the loan.
When borrowers request a loan for an amount that’s near the appraised value and therefore has a high LVR, lenders consider there to be a greater chance of the loan going into default because there is little to no equity built up within the property.
In general, investors with an LVR over 80-90 per cent are considered to be in the danger zone for lenders.
Lenders’ Mortgage Insurance
Lenders’ Mortgage Insurance is mandatory when the amount you are borrowing is more than 80 per cent of the purchase price.
It can help you buy a property sooner if you have a smaller deposit and is designed to protect the banks against the risks involved in loaning to a buyer with a low deposit amount.
Your Loan to Value Ratio determines whether you need Lenders’ Mortgage Insurance.
Equity is the difference between your mortgage and your property’s market value. For example, if your home is worth $400,000 and you owe $150,000, then you have equity of $250,000.
As you pay off your home loan your equity can increase, giving you options for further investment. If you own another property, then you can use the equity in that property as a deposit for your next investment purchase.
If you are borrowing more than 90 per cent for an investment, some lenders will want to see equity in other properties. Find out more about Using equity to buy a second property.
Loan to Value Ratios have recently been in the spotlight, with the government proposing changes to its regulation.
The Coalition has promised to help first home buyers into the market by allowing them to purchase property with a 5 per cent deposit, meaning lenders will provide loans on a 95 per cent LVR. Investors are still generally required to have a 20 per cent deposit.
Under the proposed plan the government will set aside $500m of equity through the National Housing Finance and Investment Corporation to guarantee the additional amount needed to reach the standard 20 per cent deposit.
Set to come into effect from 1st January 2020, the scheme would be available for first-home buyers with an income of up to $125,000, or couples with a joint income of up to $200,000.
The plan would allow borrowers to avoid paying thousands of dollars in Lenders Mortgage Insurance. However this could result in banks lifting interest rates to cover the costs of higher risk loans to maintain the same return on equity.
First-home buyers purchasing an investment property, also known as rentvestors, may be eligible to claim the increased interest rates on tax, as well as other expenses involved in holding a property.
Reduce your loan
Owners of any properties that generate an income may also be eligible for thousands of dollars in depreciation deductions. A BMT Tax Depreciation Schedule can provide you with additional cash flow to help you reduce your home loan faster.
Request a Quote today for a free estimate of your likely deductions or contact one of our expert staff on 1300 728 726.