When seeking funding in the form of a loan, it is important to understand a range of key concepts that apply to lender assessed financial products. This includes terms such as loan repayments, credit rating, equity, interest rates, valuation, stamp duty, and more. Another term that you should become familiar with is Loan To Value Ratio (LVR). Understanding LVR will allow you to quickly assess your financial position and calculate your borrowing capacity.
What Is Loan To Value Ratio?
Loan To Value Ratio (LVR) is a frequently used term in the world of finance, especially with respect to lending and loan applications. LVR is displayed as a percentage and is used to describe the amount being borrowed with respect to the value of the asset being used as collateral. The ratio allows lenders to determine the risk associated with a loan and set a limit depending on a wide range of circumstances.
What Is The Maximum LVR Allowed With Business Loans?
Many business owners use the equity available in personal assets such as real estate to get funding for business purposes. Using a personal home as collateral provides borrowers access to secured business loan products. Some of the major attractions of secured loans is that they have lower interest rates than other alternative forms of financing such as personal loans and credit cards.
When it comes to business loans, several factors are considered by the lender when determining the maximum LVR allowed. Simply Funds allows a maximum LVR up to 75% for business loans secured using residential or commercial property located in metropolitan areas. The maximum LVR is lower for real estate located in regional or rural areas, and the same applies to vacant land.
LVR and Buying Your First Home
For many people, the first encounter with LVR comes when buying your first home and making a home loan application. To determine your borrowing capacity when applying for a home loan, a lender conducts a valuation of the property being purchased. This is not necessarily the purchase price but rather the market value of the real estate in question. As a result, you must be careful when buying a property and trying to calculate what your LVR will be.
There are several other factors that also need to be noted. Any loans above an LVR of 80% are subject to Lenders Mortgage Insurance (LMI). In general, upfront costs such as bank valuations and Lenders Mortgage Insurance are not included in the loan amount when calculating LVR. It is not enough for a borrower to know what their loan repayments will be. You should be aware of the terms and conditions, the potential impact of a high LVR, and any risks associated with interest rate fluctuations.
Loan value ratio (LVR) is calculated by dividing the loan amount by the value of the asset. the application of LVR will vary depending on the purpose of the loan application. Examples of this are buying a property and using the equity in a property to borrow funds.
Buying A Property
Most lenders determine the value of the asset by conducting a formal valuation rather than simply using the purchase price.
For instance, the property is valued at $2,000,000 and the borrower has $475,000 in savings. Stamp Duty and associated cost total $75,000 leaving a deposit of $400,000. In this case:
Amount to be borrowed
=Value of Property – Deposit
=2,000,000 – 400,000
Loan to Value Ratio (LVR)
=Loan Amount/Value of Property
Using Equity To Access Funding
This is slightly different to buying a property as in many instances a lender will use the LVR to indicate its risk appetite. When it comes to business loans, Simply Funds has a maximum LVR of 75%. Using this as a guide, a potential applicant is then able to gauge how much they can borrow using the equity in their personal property.
Using a business owner with a property valued at $750,000 we can calculate the following:
Amount that can be borrowed
=Value of Property x (75/100)
=$750,000 x 0.75 (75%)
LVR Business Loan Examples
The following examples display the role of LVR when it comes to business loans. You will see that the borrowing capacity relies heavily on the value of the asset and the underlying equity in it.
A caveat loan is a short-term business loan in which finance is obtained and secured by a piece of real estate. They can be taken out on properties that are unencumbered (clear title of ownership) or those which have an existing mortgage attached to them.
In the following example, the owner of a proprietary company requires funding to expand their business operations. They have an unencumbered (clear ownership) regional commercial property valued at $500,000. Due to the location and type of the property, the lender is happy to offer a maximum LVR of 70%. Using the value of the property and LVR, we can calculate the amount that can be borrowed:
Amount that can be borrowed
=(Value of Property x (70/100)
=500,000 x 0.70 (70%)
Caveat loans are a fast and easy financing option. They can be settled and funded in a matter of days. If you require funds within a 24 hour period, Simply Funds offer a number of fast business loan options.
A second mortgage is a loan secured by a property in addition to the primary mortgage. There must be an existing mortgage on the property to be able to access this product, and it is different to refinancing. Major financial institutions such as banks have strict lending guidelines and a limited risk appetite. As a result, many business owners look to obtain additional funding from alternative lenders such as Simply Funds. The additional funds granted in this scenario are referred to as a second mortgage.
For this example, the real estate being used is a commercial property in a metropolitan area. It is valued at $1,000,000 and has an existing mortgage of $300,000. Due to the location, Simply Funds is happy to allow a maximum LVR of 75%.
Amount that can be borrowed
=(Value of Property – Existing Mortgage) x (75/100)
= ($1,000,000 – 300,000) x 0.75
=700,000 x 0.75