Curtis Stewart of Confidence Finance explores how using different deposit sizes and getting the best possible valuation result can help investors grow their portfolio over time.
One of the major benefits of keeping your LVRs at 80 per cent or less is that you get access to different valuation techniques. Having flexibility in valuation options can be a powerful tool for investors.
Ultimately, the ability to release equity is dependent on the banks valuation of your property compared to your existing loan balance. This determines your equity position and how much additional equity a lender will consider releasing to you.
Releasing equity is a great way for investors you come up with their deposits for future investment purchases, effectively allowing you to reinvest the capital growth in your portfolio rather than having to wait until you have saved the funds needed for a deposit. This means investors can accumulate a portfolio much quicker than they would otherwise be able to.
Getting the best valuation result
The truth is that valuations can vary greatly between banks and often deviate from fundamental asset values, depending on what type of valuation you get. Computerised valuation models (‘desktop’ valuations) tend to produce more varied results than full valuation reports completed by a valuer after inspecting the property.
These variances in valuation results does provide scope for equity to be drawn by simply ordering desktop valuations across the lender spectrum. Generally, lenders will only allow these desktop valuations to be used up to an 80 per cent LVR, so borrowing at high LVR’s means you lose the option to use desktop valuations as a tool to release equity.
This technique works by ordering desktop valuations from four to five lenders who are all likely to allow desktops at 80 per cent LVRs, and then move to the lender that offers you the greatest amount of equity.
Noting a potential ~10 per cent spectrum in valuations on individual assets between different desktop valuations, you may be able to borrow the additional funds while maintaining an 80 per cent LVR and have the side benefit of not having to pay a lenders mortgage insurance fee in the first place.
Let’s put this into an example to demonstrate how it works:
- Lisa buys a house for $300,000. She purchases with a 20 per cent deposit and has an overall loan amount of $240,000 to begin with.
- In three-six months, Lisa performs desktop valuations from the big four banks and obtains these results: St George at $290,000, CBA at $310,000, Westpac at $290,000, NAB at $320,000 and ANZ at $330,000.
- Lisa then goes and refinances to ANZ with an equity release. She increases her total loan amount to $264,000 and maintains an 80 per cent LVR.
- She has released $24,000 to use for future deposits.
- In this example, if Lisa had chosen to borrow 88 per cent when purchasing, her loan amount would be $264,000 plus the additional LMI fee. Lisa would have also lost the ability to use desktop valuations to test if equity could be released, lowering the chances of getting an unusually strong valuation result.
- Lisa has saved herself the LMI fee and kept at an 80 per cent LVR.
Given the way finance works in Australia, having temporary periods of ‘minimal equity’ or ‘no real equity’ (i.e. just paper value) doesn’t impact you too much in the short term. But keep in mind that your actual equity position may not deviate from being at an 88 per cent LVR anyway. Your paper equity is a valuable tool for growing a portfolio, but an asset is ultimately only worth what someone is willing to pay for it.
Some large property investors have used this technique to build their deposit base this way and took advantage of favorable lender calculators pre-2014. A powerful combination to build a large portfolio.
For more information on 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, check out my previous blog here.
About the Blogger
Curtis Stewart is a director at Confidence Finance, a mortgaging broking firm specialising in working with investors.