More Than Just a Number
For anyone buying property, the Loan-to-Value Ratio, or LVR, is a number worth understanding.
Insights with Infinance by Brian Coogan
Simply put, LVR measures how much you borrow compared with the value of the property. A home worth $800,000 with a $160,000 deposit and an $640,000 mortgage has an LVR of 80%.
LVRs are an important part of responsible lending. They provide a buffer between the amount owed and the value of the security, helping protect borrowers, lenders and the wider financial system when property prices fall.
The importance of that buffer became particularly clear during the Covid property boom. Record-low interest rates, strong demand and limited supply pushed house prices sharply higher. With LVR restrictions temporarily removed, some first-home buyers were able to enter the market with deposits as low as 5%.
But markets move in both directions.
A buyer who purchased a $700,000 home with a 5% deposit borrowed around $665,000. If that property's value subsequently fell to $600,000, the owner could potentially owe $65,000 more than the property is worth.
That is negative equity — and it can create real problems if the owner needs to sell, refinance or move.
This is why LVRs are not simply another obstacle for borrowers. They are an important risk-management tool. A larger deposit generally means more equity, greater protection against falling property values and potentially more lending options.
Of course, LVR is only one part of responsible lending. Lenders also consider income, existing commitments, living expenses, the purpose of the borrowing, the property's suitability as security and the borrower's ability to service the debt.
The lesson from the Covid property cycle is straightforward: buying a property is about more than getting the keys. It is about ensuring the debt remains manageable when circumstances — and property values — change.
At Infinance, we look beyond the LVR to understand the bigger picture and structure lending around the borrower's circumstances and long-term position.
For more on the above go wo www.infinance.co.nz/insights
Written by Brian Coogan, Licensed financial Adviser and Director at Infinance - Taupo