If you have ever borrowed to invest, or taken out a home loan, you would be familiar with the concept of a Loan to Value Ratio (LVR). If you have not heard the term before but are interested in investing your money, you must understand the concept. Luckily, Monzi’s here to explain it to you. Read on for our comprehensive guide.
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
What is a loan to value ratio?
An LVR is a percentage calculation used by your lender to determine your desired property or share’s value, in comparison to the money you are borrowing. Typically this LVR is a deciding factor in your lender’s decision to lend to you, as it assesses your ability to make repayments.
Your deposit influences your LVR. If your deposit is large, then your LVR may be lower, which is ideal. There are specific LVR percentages that your lender will favour over others. For instance, an LVR of 80% is the standard requirement for most home loans.
How do I calculate my loan to value ratio?
The equation for calculating your LVR is quite basic. In fact, you may even be able to do it yourself. However, your lender will do their own LVR calculation. In short, the equation looks like this:
LVR = loan amount/property value x 100
If you understand how to calculate your LVR, then this may help you gain a better understanding of what borrowing to invest might cost. As you can see from the formula, the higher your loan amount is in comparison to your property value, the higher your LVR will be.
Can a loan to value ratio calculator help?
If maths isn’t your strong suit or you simply don’t have the time, an online loan calculator that determines you LVR can make your life much easier. Typically, lenders will offer these useful tools for free through their website.
All you will need to do is provide the basic facts of your loan. This may include your loan amount as well as the value of the property or vehicle that you are buying. From there, it will spit out an estimate of your loan to value ratio.
However, remember that it will only be as accurate as the information you put in. In other words, if the value of the property differs from what you enter, then your LVR will too.
What is a good loan to value ratio?
The LVR sweet spot is 80%, meaning that you would be borrowing $8,000 for a $10,000 purchase. However, anything below this is excellent also. Your lender considers anything under 80% to be safe. Lenders consider an LVR of 100% to be very high and in some cases, this may reduce your chances of receiving loan approval. A high LVR may also mean you will have to pay additional fees to borrow.
Why do you need a good loan to value ratio?
As previously mentioned, the higher your LVR, the lower your chances may be of being approved for your loan without being charged additional fees. Having a home loan deposit of 20% or more makes you a safer borrower in the eyes of your lender.
Keep in mind that this depends on what you intend to invest in, the property may require a higher deposit in some circumstances.
What isn’t included in the loan to value ratio calculation?
The loan amount for LVR calculations exudes some costs that you should be aware of. These include conveyancing and stamp duty. Conveyancing is the process of transferring ownership of a property from one legal owner to the next.
Stamp duty, on the other hand, is a government tax levied to specific transactions. In the case of a home loan, stamp duty can also be referred to as ‘land transfer duty’. The size of this stamp duty tax is dependent on the location, the type of transaction and the value of your purchase.
What is Lender’s Mortgage Insurance?
Lender’s Mortgage Insurance (LMI) is the main additional cost you could incur on your home loan as a result of you LVR being too high. Essentially LMI is your lender’s insurance policy. It covers your lender if you cannot pay your loan repayments – which is a default on your record.
If you pay LMI, it is non-refundable and non-transferable, meaning that it may be best to do what you can to avoid incurring this LMI.
How does LMI interact with loan to value ratio?
You must pay LMI when your LVR is over 80%. It may be possible to locate a lender who could lend to high LVR without incurring an LMI, but this is not common. If you are hoping to get your loan approved without having to pay LMI, you may need to look into decreasing your LVR.
How to decrease your loan to value ratio
There are multiple ways you may be able to decrease your LVR. Keep in mind that most of these require changing your goals or letting some time pass. With this said, here’s what you may be able to do:
- Reduce the amount you want to borrow – this may lessen the difference between your deposit and loan amount.
- Delay your loan to build up your deposit – this will have a similar effect to the first point, a larger deposit may decrease your LVR.
- Ask a family member to use their equity as security – also known as a guarantor loan, if someone co-signs the loan it may allow you access to greater loan amounts. Although, your guarantor must think through all the risks associated with aiding you.
What kind of loans does loan to value ratio apply to?
LVR applies to multiple loans on the market including car loans, home loans, margin loans and refinancing. LVR is not applicable to credit cards, cash advances or personal loans.
You can learn more about borrowing to invest with Moneysmart’s easy breakdown.
Lender valuation vs purchase price
If it is a property that you are seeking to invest in, it may be worth keeping in mind that there is a difference between your lender’s valuation and your purchase price. The valuation of a property may not match its purchase price which may impact your LVR.
If the valuation is higher, this may decrease your LVR as it typically means you will be borrowing a lesser total. Although, if your valuation is lower than this, it may result in an LVR over 80%, meaning you could be required to pay the LMI. If your LVR is too high, your lender could refuse to lend to you entirely.
How do lenders value a property?
If the purchase is a result of a typical transaction via an open market, in the presence of an agent, that compares well to similar recent sales, the valuer is more likely to view the purchase price as having fair market value.
Although, if the transaction appears more inflated than it should, the valuer may inspect the property. Meaning they will examine the size and condition, as well as similar properties and the location. They may also consider the area’s future before doing the appropriate valuation, which will then influence your required loan to value ratio.
Diversifying your portfolio
Diversifying your portfolio means you are investing your money across different asset classes. Some of these asset classes include shares, bonds, private equity, and property. Then you can further diversify by expanding within that class. For example, if you choose to purchase shares, purchase them across different sectors – such as resources, energy, and financials.
Diversification can lower your portfolio’s risk. This is so that if one sector crashes or does poorly, you won’t lose all of your investments. Each share has different risk factors associated, so diversifying will balance your portfolio.
When should you invest?
There’s no better age to invest at than whatever age you are reading this (provided you are over 18). Although, it is recommended that you have no immediate debt issues, and you have established a good emergency fund in case things don’t work out.
However, in terms of when you should invest, you may be better off investing when the market is strong. Keep up with the market changes. To do this, you should be monitoring the state of the economy, relevant overseas economies, exchange rates, and interest rates as well as certain other factors. Markets change and their fluxes can help or hinder you.
Monitoring your shares
Stay up to date with trends in the market, economy, and company changes. Doing this may provide you with a better chance of acting quickly, should the market change. Possibly allowing you to avoid losses and take advantage of opportunities.
To do this efficiently, it may be useful to read about any company updates, along with their annual reports. As well as this, you should track share performance through companies such as ASIC or ASX, or the company’s website. Identify any red flags early and be sure to act as required to avoid losses.
Can I still get a loan with a bad loan to value ratio?
If you have a poor LVR, then this may make it difficult to receive approval. But, if you are willing to pay the LMI, then yes, you may still be approved for a fixed or variable rate home loan. Improving your LVR instead, however, might be the better option as it can potentially save you money.
If you are looking for a loan that doesn’t require an LVR, look beyond the standard loans and try a personal loan. Monzi may be able to match you with a lender who can possibly grant you a loan up to $10,000 without an LVR or LMI. Click apply now if you’d like to see how we work.
How can I fix a bad loan to value ratio?
To improve a bad loan to value ratio, you will have to decrease your LVR. You can do this by; reducing the amount you want to borrow, delaying your loan to build your deposit, or using a family member’s equity as security.
These options, however, all involve either waiting longer before making a purchase or compromising. If these options do not suit your preferences or timeline, you may have to make the sacrifice of paying the LMI.
Loan to value ratio for refinancing
Refinancing is the process of taking out a second loan to pay off your initial loan. Refinancing can be beneficial for reducing your interest rates or repayment time. Regardless, when refinancing, your LVR still applies.
Your equation for calculating your LVR to refinance remains the same. However, your new lender may do a new valuation on the property as the original purchase price may no longer be relevant to the property or vehicle.
Investment properties and loan to value ratio
Investment property loans are similar to standard home loans. They both consist of putting down a deposit and receiving the rest of the cash required to buy a property. And when the property is bought, you must make your interest and principal repayments until the loan balance is fully repaid.
Where the two differ, however, is in the size of the required deposit. Investment property loans may request a lower LVR, meaning a higher deposit than you would have to place for a standard home loan. Additionally, the investment loan rate attached to these loans may be larger than expected. It may help to keep this in mind when preparing to take out an investment property loan.
Low-deposit home loans and loan to value ratio
A no or low deposit home loan means you may be able to borrow up to approximately 95 per cent of the set purchase price. Also known as high loan to value ratio loans, these types of loans are possible, depending on your lender. However, lenders will view them as high-risk.
Advantages of low-deposit loans include:
- You may get into a house faster (there are disadvantages to this so don’t stop reading here).
- If you are anticipating a possible income increase, you will be able to make your repayments faster, lowering the risks.
- Or, if you are knowledgeable in the property scene, and buy to renovate and sell, a low-deposit loan may speed up this process.
Disadvantages of low-deposit loans include:
- Getting into a house faster can be counteracted by higher interest rates and a longer repayment period.
- If you are only seeking a family home, a low deposit loan may turn around to bite you.
Sacrificing loan features for a low-deposit loan
So, you’ve found a high LVR loan? Fantastic, but have you considered what loan features you could be sacrificing to take this loan alternative? Will you be losing some flexibility? Are you sacrificing a lack of application fees, offset accounts or interest rate discounts?
Typical investment loans may come with additional features that are far more appealing than the features of a low-deposit loan. Ensure you consider what you could be missing out on before deciding to go with a high LVR loan.
What is gearing?
Gearing is essentially an overarching term covering investment and margin loans. However, gearing is generally referred to concerning the housing and property market.
Successful gearing is intended to increase wealth accumulation through investing capital alongside your borrowed funds. For gearing to benefit you, the return from your investments should exceed the total of the investment and the loan. To do well, you will need to be accepting of the risks associated with investment loans.
Positive and negative gearing
As discussed above, borrowing money to invest, is an act of gearing. However, were you aware that the income you earn off of your investments can be positively or negatively geared?
- Positively geared – if your investment is positively geared, the return received from your tenants is more than the property-related expenses you incur.
- Negatively geared – if your investment is negatively geared, the return received from your tenants is less than the property-related expenses you incur.
Margin loans, otherwise known as investment loans, are loans that allow you to borrow to invest in shares. As with a traditional loan, to apply for a margin loan, you must place a deposit. However, the capital used for your deposit can be in cash or the form of various securities in your possession. To see which securities are viable, you can refer to your lender’s ASL.
LVR has a role in margin loans as the securities you use, amount to the loan to value ratio. This LVR then equates to your financial position. When your margin loan is approved, you can purchase more securities, which allows you to increase your LVR.
What is an Approved Securities List (ASL)?
An ASL, is your lender’s list of all the forms of capital they will accept as collateral for your loan. If you are already in possession of shares, provided they are listed in the ASL, you may be able to use them as collateral.
Alternatively, if you wish to purchase shares that are listed on your lender’s ASL, your lender will loan funds up to the LVR for that security, to you.
Items that aren’t investments
There are many things on the market that you can invest your money in. However, there are some misconceptions about what is an investment and what isn’t.
Your car is not an investment. Let’s get that one out of the way first. As soon as you drive your car off the lot, it begins depreciating. Please don’t assume your car is an investment, no matter the upgrades you’ve given it, or how much it means to you. If you are considering buying a car, it may be wiser to take out a standard car loan.
Homely possessions are not investments, either. If you borrow to invest, instead consider using this money for bonds, stock, shares, gold, mutual funds, or property. These items may generate you a decent return, rather than losing their value over time (depending on the market).
Have you considered investing overseas? The Australian share market only has a small portion of the world’s shares. There are a plethora of investment opportunities in overseas markets that are available to explore. This also works to diversify your portfolio as if the Australian market were to fail, you could fall back on the American or European market, for example.
When investing in overseas markets, however, keep in mind that there is an accompanying exchange rate risk. Factor this into your investment plan if you are looking to expand into other markets.
Capital gains and losses
Capital gains occur when you sell your investments for more than the initial price you bought it for. Whilst this is the desired outcome, keep in mind that gains come with a capital gains tax. Any profit you make on your investment will need to be factored in when paying your taxes. Holding the property for longer than 12 months means you will only be taxed on half of the investment’s gain.
Although, if you sell your investment for less than the initial purchase price, you will make a capital loss. Capital losses can be used to reduce capital gains made in the same year that the loss occurred. You may also carry a loss forward to offset future gains, reducing possible tax.
Personal loans and Monzi
While we provide handy breakdowns on topics such as LVR, Monzi is also one of Australia’s leading lender-finder services.
In short, we match Aussies just like you with a range of lenders offering personal loans up to $10,000. All it takes is one simple application. Best of all, you can borrow the cash you need today and divide the costs over the coming months or years. In fact, the lenders in Monzi’s network may offer repayment terms of between 12 and 24 months.
So, are you after emergency loans? Do you need a little boost to get you through?
Apply for cash loans today with Monzi. We may match you with a great Aussie lender before you know it.
Am I eligible?
While Monzi aims to help as many Aussies as possible, we do have a few criteria that you must meet before you begin. No need to worry though. They’re quite simple. Just make sure you check these four boxes:
- Australian citizen or permanent resident.
- At least 18 years of age.
- Have a current email address and contact number.
- Possess an online bank account with at least three months of transaction history.
If you fail to meet any of the above criteria, then your application may not progress.
How do I apply?
Now that you’ve made sure that you’re eligible, you’re free to move onto applying.
At Monzi, we’ve made it easy for you. All you need to do is follow these quick steps and before you know it, you could match with a great Aussie lender:
- Using Monzi’s loan slider at the top of the page, select your loan amount and repayment term preference(if applicable).
- Enter the required personal and financial details. Then, submit your application.
- We take it from here. Once we receive your completed application, our automated system will attempt to match you with a lender from our network. Apply during business hours and this may take as little as 60 minutes.
- If we successfully match you with a lender, then they will be in touch to conduct an assessment.
Note, however, that approval is not certain. While we’ll do what we can to match you with an available credit provider, lenders will always assess your application to determine if the credit is suitable for your needs and objectives.
Contact us today!
If you have any questions regarding using a personal loan as a possible alternative to any of the previously mentioned loans, don’t hesitate to get in touch.
Email us at firstname.lastname@example.org and our friendly team will be around to help. Please note that as we are only a lender-finder service, we can only answer questions relating to our organisation and services.
We’ve done our best to explain loan to value ratios in an easy to understand manner. Unfortunately, though, we cannot offer products that relate to this. Instead, we operate as a lender-finder service that can help you find lenders online offer cash loans from $300 to $10,000.
So, if you need quick and easy finance, turn to Monzi. You may be matched with a lender in just 60 minutes. Use the loan slider at the top of the page to apply now.
Before you go, why not check out our next article on negative interest rates?