You may have heard that recently some banks have changed their lending criteria for property investors, making investment loans more expensive and harder to get.
Specifically, many banks have put a cap on their Loan to Value Ratios (LVR.)
So let’s have a quick look why they are doing this and what does LVR mean?
What is Loan to Value Ratio?
The LVR is a percentage figure that compares how much a lender is willing to loan you against the value of the property you own or plan to buy.
Imagine you’ve saved $100,000 for the deposit on your new home or investment property.
If you planned to use this to buy a $500,000 you’d need to take out a mortgage (loan) of $400,000 (excluding other costs) and your LVR would be $400,000 ÷ $500,000 (x100) = 80%.
If you only had $50,000 deposit and were able to borrow $450,000 your LVR would be $450,000 ÷ $500,000 (x100) = 90%.
How big a deposit do I need to buy a property?
While up until recently some lenders were prepared to lend up to 95% of a property’s value as the LVR, recently APRA has tightened the screws and many banks are now reluctant to lend above 80% LVR.
If you were able to get away with a lower deposit, and therefore had a higher LVR, you would have been required to take out Lenders’ Mortgage Insurance (LMI) but now, as I explained, many lenders have tightened their lending criteria.
Don’t forget that other than the deposit you’ll also need to fund stamp duty (around 5% of the property cost) as well as legal fees and other costs.
Why the new restrictions?
The Australian Prudential Regulation Authority (APRA) is the regulator that oversees banks, credit unions, building societies and other authorised deposit-taking institutions (ADIs).
It says high LVR loans are an example of “higher risk mortgage lending”, and that “in the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth”, they need to be closely supervised.
To understand more about all the fuss about APRA – please read this blog: Explainer: What the APRA changes mean for property investors.
LVR and postcode restrictions
By the way…most lenders cap the LVR on loans in certain post codes, where they perceive a higher risk to their lending.
In particular they tend to be worried about mining towns and inner CBD locations where there is a glut of new and off the plan apartments.
In today’s volatile lending environment, it pays to use a proficient finance broker to help you through the maze of obtaining a loan.