Finance advice
Cate Bakos

Understanding loan-to-value ratios

By Cate Bakos

Many investors know what LVR stands for, but how many understand what loan-to-value ratio means and how it can impact many facets of investing?

Blogger: Cate Bakos, director, Cate Bakos Property

LVR is becoming more and more critical with every lender’s policy renewal for investment lending. Since APRA instigated significant changes in early 2015, to reduce the hefty balance of investors who were borrowing, our marketplace has been affected and some investors have been taken by surprise when it has come time to purchase. And not all of the surprises have been good ones.

The initial change that was palpable was the restriction on the LVR that banks would lend to. Lenders opted out of the 95 per cent marketplace almost overnight. Some reduced their maximum lending amount to 80 per cent and some remained at 90 per cent. What this adversely changed (aside from the circumstances of investors with limited equity in their own home/other properties), was the number of young investors embarking on their first investment purchase as their first property purchase. Commonly referred to as rent-vestors, this contingent were happily going about building their financial futures while house-sharing, living at home with parents, or renting a compromised property temporarily. Faced with the prospect of having to save not just 10 per cent of the purchase price (to account for a 5 per cent deposit plus stamp duty and purchase costs), but in some cases 25 per cent, many investors in this category found that they had to opt out of the investment property market and re-think their strategies.

The second challenge we’ve seen investors face as a result of the reduced LVR policy relates to lenders’ stringent adherence to what we refer to as ‘global LVR’. For those who have opted to cross-securitise their lending (i.e. combine all properties into one giant loan facility with one lender) and don’t have sufficient equity in their own home or other assets, lenders have requested the LVR is decreased; whether it be by additional contributions, principal payment inclusion, or divestment. This is never a pleasant situation for any investor to face and it heightens the importance of maintaining a cash buffer for such rainy days.

The third challenge relates to equity releases for the purposes of investing. If the amount of equity that was once available from existing investment properties is suddenly reduced, this can have a devastating effect on a long-range settlement (such as an ‘off-the-plan’ investment) if the buyer has not released the funds earlier and had them available. There are many risks associated with off-the-plan securities and this is just one of them. In addition, harsher LVR restrictions that lenders choose to apply on certain projects, buildings, postcodes and zones can also have dire consequences if the property purchase was only approved conditionally prior the policy change.

The fourth consequence that some buyers may currently face relates to what any real estate agent dreads: a valuation shortfall. This means that a valuer deems an unconditional purchase price an inflated price after the sale has gone unconditional. While this is very rare in auction situations (most valuers accept that the auction price is a true reflection of market value), I am aware of rare situations where a valuer has deemed the result an over-payment. Riskier still are purchases made prior to auction. Whether a dutch auction prevails, or if competing buyers fight it out in a boardroom mid-week, a valuer can deem a sale price ‘inflated’. Should this occur, there are often few avenues left for the buyer to challenge the valuation. Some may have a plan B and will pursue a loan with an alternative lender, but avoiding such an exercise in the first place is always preferable. Being mindful of LVR maximums is critical in this situation, and it is smart to ask yourself whether your plan B allows you to extend your LVR in your current pre-approved loan. While valuation shortfalls are uncommon, they are never welcome news.

LVR determines so much more than whether a lender could accept or reject a loan. It underpins cash flow, the level of risk a buyer can take on, the rate of acquisitions they could embark on if building a portfolio, and whether an investment or a home is the next purchase for them.

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About the Blogger

Cate Bakos

Cate Bakos

Cate Bakos is an independent buyers advocate, a qualified property investment advisor, and owner and manager of Cate Bakos Property.

FROM THE WEB

podcast

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

3 big property investment myths busted open
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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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