Ep1: What is an LVR? Can it affect your interest rate?

Welcome to the Weekend Investor.

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I'm Max Lending, your industry insider, and we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances and get investing into the property market.

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Welcome to the episode and thanks for tuning into the podcast today.

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So we're gonna touch on today our overarching series, which we're gonna be talking about the true costs of actually owning a house.

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So this is gonna break down what are the actual costs of getting into the real estate market.

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Each episode we'll touch on a different topic, but I think where we're gonna start with this one is going down to the basics.

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Well, might seem like basics, but it's actually a lot to understand and unpack.

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But in episode one, uh, we're gonna be touching on what is an LVR.

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OK, so let's start at the beginning.

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It's pretty simple, right?

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You just what?

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Log on to domain or realestate.com, search for a house you like, save up some money and then go down to that loan shop and just say, hey, lend me the rest of the funds and then boom, house is yours.

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Go to auction.

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Done.

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Pretty simple.

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Yeah, well, you've got to actually think.

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Well, think in this instance, you need to actually have a fundamental understanding of what, how much can you borrow?

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How much do you say you need as cash to be able to have saved in advance before you start looking to purchase?

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What can you actually afford?

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And the biggest problem a lot of people start with where they're put in the too hard basket is where do they actually begin?

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It's all like very overwhelming and I understand.

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Over the next few episodes though, we're going to break this down for you, make it as simple as possible, get you in position, ready to start your investment journey as such.

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I love that word journey.

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Anyway, stick with us.

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And by the end of it though, you're going to be pretty confident.

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You're going to know exactly what you can afford and how you can actually get into the property market.

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Don't listen to the it's out there.

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There's a lot of them.

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You know, maybe I'm one of them.

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But look, there's no tricks to the trade.

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It's simple math, basically.

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Save up, buy in your price range.

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Don't overcommit.

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I've been in the mortgage industry for a long time and the biggest issue that I see from time and time again are people just overexposing themselves and brewing more than they can afford.

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Even if on paper, OK, it says, Oh yeah, look, you earn X, expenses will be Y.

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So essentially you can afford this really big juicy loan.

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And then the real question is though, should you get this big giant loan?

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What could turn the buying process of getting your dream home?

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It's going to become a nightmare.

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You're going to end up being a slave to the mortgage and the rest of your life not being actually able to live like a meaningful existence.

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You're going to be working every cent you'd be earning.

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It's going to go into that mortgage because you've over committed and you're going to end up drowning in debt.

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So let's start with something simple, the simplest of concepts, something that everyone needs to get their head around.

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LVR.

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This stands for loan to value ratio.

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It's a measure of how much you can borrow.

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You compare the value of the property to the amount you're borrowing.

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It might sound simple, but it's actually the part that most people get wrong.

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They either have an LVR that is way too high, locking them into paying extraordinary interest rate.

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Zapping any free cash flow they have each month or actually not borrowing enough.

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So when it comes to settling the purchase, they've used up all their free cash, leaving them with no emergency funds whatsoever.

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So let's do like a quick example.

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Numbers always help.

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So you want to buy, let's say a property that's $800,000 and you want an 80% LVR.

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Well, that's going to be a total loan of about 640 K, meaning that you're going to need a deposit.

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Of 20%, so 80% of this is a loan.

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The 20% is deposit.

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So 160K will be your deposit which represents 20% of 800 K and 80% will be a loan which be 640.

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If you want to figure out how to do that, you just take 800 K times by .2 to get your 20% deposit or by .8 to get your 640K loan.

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Now, don't get this confused.

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This is not your funds to complete the purchase.

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It's just the deposit.

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We'll go through all the other costs, all the fun stuff that you're going to need to save up for, which are the associated costs of actually buying a house.

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Example would be like stamp duty, legal fees, et cetera, but we'll go through those a little bit later.

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All right, let's get back to LVRs.

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Something you need to consider, though, is that anything that is above 80%, the banks are going to consider youA risky prospect and they weren't going to charge you LMI.

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Let me guess your next question is what the hell is LMI?

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Well, it stands for lenders mortgage insurance.

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It's basically an insurance policy that the banks take out against you in the event that you default on your repayment.

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So they pass this insurance premium or this insurance fee onto you and it's added on top of your loan amount.

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Could range from a few $1000 to 10s of thousands of dollars.

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Just depends on how much you're borrowing.

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The premiums added to the loan amount, so it's going to affect your overall LVR, which could actually affect your interest rate because the additional loan amount could topple you over the 80% mark and increase you into let's say the 80 plus interest rates.

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Now let's unlock the next fun part of this interest rates.

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Depending on what your overall LVR, it's going to determine the rate.

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That you're being charged for that loan.

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A higher LVR is going to represent to the bank a riskier prospect.

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So you as a borrower is riskier.

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So you're going to receive a higher interest rate.

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Most banks when it comes to interest rates, they like to price it in three categories mainly.

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So this is not always the case, but it's mostly the case.

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Interest rates are priced at your 80% mark, that's an 80% loan, 20% deposit.

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Your 90% mark and your 95% mark.

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Now if you're thinking what if I want to borrow at 85%, well you're going to be priced at the 90% rate.

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So anything above 80 to 90 is going to be the same interest rate and same thing with 95.

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If you've got a 92% loan, you're going to be charged the 95% rate.

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Anything above 90 will attract the 95% rate.

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So you understand though 80%.

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Is pretty much the standard across all lenders.

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That's what banks see as the typical risk free type of client.

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The rates will increase depending on the risk and 80% would be seen as the the baseline.

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As we mentioned before, just to summarise, 80% is probably the best rates, 80 to 90% you got LMI premium to add on top of it.

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And you'll probably get an OK rate, probably a little bit high.

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And anything above 90% to a maximum of 95 is gonna be pretty high rates.

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That's because really you're only gonna be putting in a 5% deposit.

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Now there is no banks out there gonna lend to you above 95%.

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Let's just be honest, if you don't have a 5% deposit on the house you're looking to purchase, then don't buy the house.

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For God's sake, you're not ready.

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In all honesty though, if you're looking to purchase a house, you should be looking at that 80% range.

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You can borrow higher if need be, but you need to actually be aware of the detriment you could be putting yourself in.

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Not only is there a higher interest rate, you could also be stuck at the current bank you're with and just having to cop it in whatever interest rates they decide to charge you moving forward, because no bank really wants to refinance you above 80%.

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So if you go get a loan with Bank XYZ.

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And you're at 95 and then two years later you go, hey, you know what, I don't like the interest rate I'm on or there's another bank offering a better interest rate.

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You can't actually refinance that property because minimum refinance, LVR, the bank that's going to be receiving this loan that you want to send it to actually only wants you at 80%.

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So hopefully your house price has gone up in the meantime, but if not, you're stuck.

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That's what's called a mortgage prisoner.

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And here at the Weekend Investor, we don't teach you to be an idiot.

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Now, if you're thinking, why not just borrow as much as possible because you don't need as much down payment, I'm going to come over there and slap you in the face.

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By the time you've finished our podcast series on what's the true cost of buying a house, you're going to start to realise that you're going to have to be smart and be strategic.

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Don't be the fool.

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You might have got a little bit worked out there towards the end, but you get the gist.

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Thank you guys for listening to today's episode and I'll see you at the next one.

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If you have a question that you would like answered on the show about budgeting, mortgages or finance, then drop us a line either via our socials, e-mail or website.

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Details available in the show notes.