The Importance of Loan-to-Value Ratios
Dilleen Property Group 2021
Loan-to-Value ratios (LVR) is a super important term that you should know as a property investor, especially if you want to build your property portfolio with the use of equity. One of the many facets of property investing and building a property portfolio to create wealth comes down to understanding finance and being able to use that to your advantage.
LVRs are particularly useful if you want to find out whether you have enough equity available to buy another property and continue building your property portfolio. An LVR is the value of the property compared to the loan of the property, and it is illustrated as a percentage. As an example, if you have a property worth $500,000 and the loan left on the property is $250,000 your LVR is 50%.
Generally, when you're going to a bank and you apply for a loan, the most a bank will lend you is 80-90 percent and in some cases even more. Let’s say in this instance that the bank will only give you a loan of 80% of the property’s value. If you purchase your property for $500,000 and your loan is $250,000, some people may say that they have $250,000 of equity that they can access to buy the next property. However, this is a common misconception and is overall incorrect. You cannot use all of the $250,000.
How To Work Out Your Accessible Equity
Firstly, you need to find out 80% of $500,000. 80% of $500,000 is $400,000. In this instance the equity you can access is $400,000 (80% of the loan) - $250,000 (loan amount owing) which is $150,000 in accessible equity. Learning LVRs is especially important if you are looking to grow a portfolio of properties, create an income through the property and get yourself to where you want to be financially.
Another important facet and strategy that I personally use for myself and clients are buying below comparable sales or below bank valuation. In this case, if you purchase $30,000 below bank valuation, within 3-months – 1 year you can get this property re-valued by the bank and release the equity instantly. Instead of waiting for it to grow in value over 3-5 years, if you buy below market value you can purchase another property pretty much right away.
If you are looking to build your property portfolio, learning loan-to-value ratios is the best advice I can give you! It is important for any property investor if your goal is to build your property portfolio quicker and get ahead of the game.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
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