Discover your Steps to Freedom here! Using property investing techniques along with financing methods that benefit you, you can gain financial freedom in your life.
Loan to Value Ratio - What Is It & How Can It Help You?
Simply put loan to value ratio(LVR) is a ratio that the banks and financial institutions use to assess the level of debt that a certain asset should have.
What does it mean if a bank will give you a HIGH loan value ratio when you are applying for a loan on a particular investment property?
What does it mean if a bank will only give you a LOW loan value ratio when making a morgtage application.
What Does A High LVR Mean To You?
If you can get a high LVR then that means that the bank or financial institution is willing to loan you more of the purchase price of your property.
For example, the loan to value ratio for property is higher than the LVR that banks will give for say shares.
So for example say you wanted to purchase a $100,000 investment.
A bank will be happy to lend you $80,000 on a $100,000 property giving an LVR of 80%
If you were investing in shares the margin loan (LVR) they would give you is usually about 50% and some times less. This would give you an LVR of 50% or less! So that means they would only loan you $50,000 of the $100,000 worth of shares you wanted to buy.
Lenders Mortgage Insurance - Overcome a Low LVR?
If you are given a low LVR by the bank when applying for a loan, then they are giving you a measure of what the level of debt or risk on that property that they are willing to support.
In the case of property, this means that you will either need to fund the difference out of your available cash or find further finance to purchase.
The alternate method to overcoming the situation where you are given a low LVR is to use lenders mortgage insurance.
The Differences between Financial Institutions
There are differences between financial institutions.
Different banks and other mortgage originators will use different valuers and have different methods of assigning or determining value.
Some will be more keen to get your business and so be willing to offer you a higher LVR. This is better for you.
So shop around when looking for a loan and find the lender that will give you the best loan to value ratio that you can get and preserve your available capital reserves.
Perhaps a loan officer mentioned it in passing during your borrowing capacity assessment interview.
You should always have your finance capacity assessed prior to looking for property. This will do several things for you when looking and evaluating properties.
Firstly it will help you to home in on the right property type and price range of property to look at and avoid wasting your time.
Secondly when you do find a property that fits your property investment criteria then you are in a more powerful position. Both in terms of bargaining for the price you will pay negotiiating the terms that suit you best.
Lenders Mortgage Insurance is a Tool
Do not view LMI as an expense to be avoided.
LMI is a very useful tool that will improve your real rate of return or return on equity invested. I will outline the way that this works below.
Because you can borrow more, with your existing financial resources, LMI will also help you progress faster toward acheiving the property investing nirvana that you are seeking. Whether that be total financial independance, extra money to give to the worthy cause of your choice or the knowledge that you have total financial security.
For now just say that if you want to buy a property worth $100,000 then the bank would normally ask you to come up with $20,000 for the deposit. Which is a standard requirement of many banks.
This is where lenders mortgage insurance (LMI) comes into play. Using LMI you can reduce the amount required for the deposit to as low as 5 percent, perhaps less, depending on your financial institution.
LMI is Your Greatest Ally
Many new investors see a request from the bank to use of lenders mortgage insurance as an added expense. An additional cost barrier imposed by the banks to stop you from acheiving your investment goals.
Do not look at it this way. LMI is your friend. Professional investors (this means people like you) see the use of LMI as their greatest ally when it comes to obtaining the finance they need.
As I will show you below LMI is a very useful tool for real estate investors
LMI is a Capitalizable Expense
The great thing about using lenders mortgage insurance is that you can generally add the amount that LMI will cost you on to the amount being financed.
Why is this so beneficial to you?
Because it saves you using your precious available capital or equity. This can make an substantialf difference when you want to move on to your next investment property.
Is LMI a Tax Deduction
Lenders mortgage insurance can be viewed as a cost of doing business.
As such it can be deducted from your gross income when it comes to tax time.*
Your gross income is the rental income from your investment property and any other income you may have to declare in a tax year.
LMI Improves Your Return on Equity Invested
Quite simply put lenders mortgage insurance will improve your return on equity invested by allowing you to invest less equity in each property you buy.
So from the example above, using the standard requirement of the need for a 20% deposit with a $100,000 property. This would give a loan to value ratio of 80% and then your capital requirement would be $20,000. ($100,000 x 20%).
If the value of your property were to go up by 10% in one year to be valued at $110,000 then your net increase would be $10,000.
This equates to a 50% return on equity invested. ($10,000 / $20,000 x 100)
If by the use of lenders mortgage insurance you were able to reduce the deposit requirement ot 5% or $5,000 ($100,000 x 5%) and your property rose in value by the same 10% then ou would have a 200% return on equity invested. ($10,000 / $5,000 x 100) of 80%.
If you had $20,000 to invest you may think great, I'll just pay my $20,000 deposit and get my investment property. But if you used LMI you could lower the capital requirement to just $5,000.
In this case you culd then afford to purchase 4 properties instead of just your original one.
For now it is enough to say that banks use your loan to value ratio (LVR) to calculate the level of debt (risk from the banks point of view) that they would be acceptable for a particular asset.
Some banks and financial institutions are more strict on this criteria than others, especially in the light of the sub-prime mortgage crisis that has caused a stir with less than optimally financed properties.
However that will not be you. You are aiming to obtain premium quality financing at terms favourable to you, not the banks.
And this is very acheivable, thousands of people have done it before you and millions more will do it in the future.
The Benefits of LMI - A Summary
In summary, lenders mortgage insurance can reduce your capital outlay requirements, enable you to progress faster with your property investment ambitions and improve your return on investment for any property.
This Simple Technique Can Help You Get Your First Investment Property
And Then The Next And The Next...
Refinancing Real Estate Investment is one of the best ways to begin real estate investing and keep progressing in your freedom steps with property investing.
If you are just starting out one of the best ways to get the money you need is to use the existing equity you have in your home. The best thing about refinancing real estate investment is that it allows you to get started without having to find out of pocket money for the property deposit and purchase costs.
You do this by first refinancing your home.
There are two ways you can go about refinancing real estate investment property:
Use your home or other property to secure a loan for the next property.
This is where you make a specific proposal to purchase a piece of real estate investment property using your home to secure the difference between the purchase price and the banks LVR (loan to value ratio) policy.
This will end up in your home being cross collateralized with the associated future difficulties that can lead to.
Request your bank of choice to set you up a home equity Line of Credit.
This is where the bank agrees to loan you any amount up to the limit determined by the available equity ou have in your home.
When refinancing real estate investment a cross colllateralized loan is the easiest to set up. It is probably the avenue that the bank or financial institution will assume you want to do it, but if you want to build a substantial real estate based portfolio, then request a line of credit be set up for you.
Then you will be able to access the money with ease and at your convenience.
For other advantages of a home equity line of credit or a line of credit generally refer to the HELOC page:
Lay the Foundations for Real Estate Investing Success
For the first investment property or maybe even the first two peices of investment real estate, a cross colllateralized loan is the easiest to set up. It is probably the avenue that the bank or financial institution will assume you want to do it, but if you want to build a substantial real estate based portfolio, then request a line of credit be set up for you.
Then you will be able to access the money with ease and at your convenience.
For other advantages of a home equity line of credit or a line of credit generally refer tothe HELOC page: Home Equity Line Of Credit
A brief outline of the specific advantages when refinancing real estate investment are that you can start with little on no money of your own and as equity builds you can continue with your refinancing real estate investment properties and purchase more.
In this way Your asset base continues to grow, and it can all be funded by your growing equity base.
The way this works best is to always plan on holding your investment properties long term. If you adopt that attitude and ride out the occasional volatility of thte market then you are almost guaranteed success.
When refinancing real estate investment it is important that your first properties be new, so that you can claim maximum tax deductability for depreciation and expenses. You will need competent advice on this for your particular country and area.
See my other pages for tips on how to best set up your financing and reducing our tax burden in the asset building stage.
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