Curtis Stewart of Confidence Finance breaks down some of the pros and cons of using high LVR loans, and how investors can use some of the features available at lower LVRs to help grow their portfolio.
Investors often use 88 per cent loans in order to use more of the banks money and less of their own money than a more traditional 20 per cent deposit, 80 per cent loan structure.
In this high LVR, they also incur a lenders mortgage insurance (LMI) fee from the bank that can be added to the loan, taking the final loan amount to approximately a 90 per cent LVR.
However, there are significant financing benefits associated by purchasing with 20 per cent deposits that investors lose access to when they purchase at higher LVRs.
It may not mean that 20 per cent deposits are your best option, but it’s important to consider the opportunity cost of the financing decisions you make. In some circumstances, using larger deposits can assist you to grow a larger portfolio over time.
Access to more favourable valuation techniques
One of the biggest advantages for investors operating at an 80 per cent LVR (or lower) is that they have access to different valuation methods. Many of the major lenders have computerised valuation models that customers can use to release equity up to an 80 per cent LVR.
By keeping an LVR of 80 per cent or below, you also open up the pool of lenders who will consider a refinance. Having flexibility to move between lenders allows you to:
- Strategically move between lenders as it suits your portfolio accumulation;
- Sometimes your situation/plans may change or lender calculators/policy may adjust and you may need to move lenders to achieve your goal. This is easier and cheaper at 80 per cent; and
- Cost consolidate; if you want to move to cheaper options and promotions, they’re more readily available.
Quick tip, if you are seeking fast deposit creation, it does make sense to be on variable rates to take advantage of this flexibility you’ve offered yourself.
The cost of LMI
Another advantage of being at an 80 per cent LVR is that you avoid having to pay an LMI fee. There are many good information sources out there on LMI, but the key point is that LMI is a risk related fee you pay in order to protect the lender. LMI offers no benefits or protections to use as a borrower. It is just the cost of doing business at a riskier (higher) LVR.
- By sticking to an 80 per cent LVR you avoid the extra 1.5 per cent to 2 per cent in LMI fees;
- Note that LMI isn’t transferrable through lenders and can only be used as a credit with your existing lender; and
- Some lenders offer cheaper rates/greater discounts for 80 per cent LVR loans vs LMI loans.
Lower LVRs mean a more resilient portfolio
Finally, it may seem like an obvious point, but it’s important to note that lower LVR portfolios are more resilient.
- The obvious safety buffer of being able to liquidate more readily and knowing that you’re likely to walk away with funds is a source of risk mitigation.
- At 88 per cent LVRs, it is less prudent to rely on equity in your properties as a store of emergency funds given the lumpy transaction costs.
High LVR loans definitely have their place in the market and can be the right option at particular points in an investor’s journey. However, it’s important to challenge the idea that you should always borrow as much of the banks money as possible. Weighing up what you are potentially missing out on, as well as the potential benefits, will allow you to make an informed decision and optimise the finance structure of your portfolio.