How does it work and how does it effect you?
LVR - It's a term that's been thrown around in the media a lot over the last couple of years and I've come to realize that as an industry we don't do a great job of explaining exactly what it is and how it effects you when you're borrowing money. In this blog we'll hopefully make the rules and regulations around LVR's a lot clearer.
LVR - Loan to Value Ratio
Simple - It's the amount of your loan, relative to the value of your property. If you owe $80K and your property is worth $100K then your LVR is 80%.
If you owe $750K in total and you have 4 properties worth $400K each then your LVR is 47%. That's your total lending divided by the total value of all of your properties.It's important to know that the bank take your LVR as an overall.
Let's look at some frequently asked questions...
I'm buying a property for $80K but the Rating Valuation is $100K, does that mean my LVR is 80% even with putting no deposit in?
Unfortunately the answer to this is a simple, no. All banks use the lower of the purchase price or valuation when calculating an LVR.
I've renovated my house and it's worth heaps. Can I borrow more?
I want to put 20% deposit in to the purchase and borrow an extra $50K for renovations. This does seem like a good idea but remembering that the bank calculates your LVR based on your lending amount relative to the value of your property. Back to that $100K property, if you've put in $20K deposit and want to borrow another $50K then your LVR will actually be 130% because you've borrowed $130K against the value of $100K.
But I'm going to spend it on improving the property! We trust that you will, but the reality is that once you've got that money you could actually spend it anywhere. If that's on flights to mexico and a years supply of Margaritas then the bank has no way of getting their loan repaid. If you do want to renovate there is a finance product for that and we cover that in more detail in our renovating blog.