Loan to value ratio explained

BMT team — Thu, 30 May 2019 23:18:37 +0000

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. In this article we will explore: What is a Loan to Value Ratio? How are Loan to Value Ratios calculated? Lenders’ Mortgage Insurance Equity Recent changes 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 secure 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 higher risk for lenders. Lenders’ Mortgage Insurance Lenders’ Mortgage Insurance is sometimes 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 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. Some lenders also include a Loan to Value Ratio when calculating equity. 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 security 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. Recent changes 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. 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. First-home buyers purchasing an investment property while renting, also known as rentvestors, are eligible to claim interest to reduce their tax liabilities, as well as other expenses involved in holding a property. 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.

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Using equity to buy a second property

BMT team — Thu, 21 Mar 2019 04:06:09 +0000

Are you a home owner looking to buy an investment property? You may be able to use the equity in your home as a deposit to buy the property, without using your own cash. In this article we will explore: What is equity? Do your research Renovations Reduce debt Get your property revalued The benefits of equity – more properties What is equity? Equity is the portion of a property that you truly ‘own’. It’s the difference between the market value and the amount you still owe on it. For example, if your property was valued at $600,000 and you have debts of $400,000 then you would have $200,000 in equity. Here are five ways you can begin to build more equity. 1. Do your research Equity can build when the market value of your property increases. Before you buy any property, whether a home or an investment property, do your due diligence and favour an up-and-coming area likely to grow in popularity. It’s also important to consider whether the location of the property is close to amenities like public transport, schools and shopping centres, as this will affect property values. BMT Tax Depreciation has developed an online portal, MyBMT, which helps property buyers make informed decisions. The new research and insights tab helps you to learn more about the area in which a property is located, to discover newly listed properties in the area and see important metrics such as recent census data. This information can assist the decision of whether to buy a property. The research and insights tab also informs you of any lodged planning applications and new developments in the area so there are no surprises after purchase that could decrease the property’s value. 2. Renovations Making upgrades and renovations can boost the market value of your home, but it’s important to avoid overcapitalising. Updating kitchens and bathrooms, improving landscaping and making the home more energy-efficient can all pay off. However, those projects cost money up front and you need to be confident that you can recoup the costs. If you’re making improvements mainly to build equity, pick projects with the highest return on investment. Read about how a renovation achieved a 13 per cent yield here. Get a feel for how much your proposed renovation will cost by collecting quotes and speaking to others in your area who have recently renovated. It’s also important to be consistent with the property’s upkeep. Routine maintenance is tedious and costs money, but a home that’s falling apart is not appealing. If you fail to address maintenance issues like leaks and deteriorating roofing, your home equity may begin to decrease over time. Keep in mind that any renovations which are completed to investment properties should increase your depreciation claim for eligible items, which in turn will reduce your tax bill. You may also be eligible to ‘scrap’ any assets you’ve removed during renovations. For a free estimate of the likely depreciation deductions you could be claiming from your investment property renovation, contact the expert team at BMT. 3. Reduce debt By lowering your mortgage you are effectively increasing your equity in that property. Even if you have a thirty-year mortgage, you can speed things up by paying extra. Each additional dollar you pay above your required monthly payment reduces your debt and can add to your equity. If you are making mortgage repayments on a monthly basis, consider changing your repayments to fortnightly. Generally, the more often you’re paying funds onto your loan, the less interest you will pay overall. This is because the loan balance is constantly reducing. 4. Get your property revalued Getting your property revalued when markets are high can give you more equity. If your property has gone up in value, it’s worth getting your property revalued because you could use that extra equity to reinvest. 5. The benefits of equity – more properties Equity makes it possible for property investors to refinance a loan and access funds to use as a deposit to buy other properties. The more properties you have, the more equity you could potentially build, as the value of the properties goes up and the tenants pay off your loans. You might also enjoy: Steps to expand your property portfolio When do you pay capital gains tax on investment property? How to become a property investor while earning less than $80k per year

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Loan to value ratio explained

Using equity to buy a second property