Understanding Different Loan to Value Ratios and some Tips You Ought to Know!
Here is what I am talking about in my Video:
LVR stands for “Loan to Value Ratio”. The golden rule of the bank is this 80-20 rule, like everything else in life. If you buy a property for $1,000,000, the bank is happy to lend you 80% of that, being $800,000. The reason for that is it gives them a little bit of a buffer. It’s in case they have to foreclose and use the right of their mortgage to sell the property on you and reclaim their money. The 20% is a nice buffer because they assume that the market might have come down by 10%. By the time you don’t make your repayments for 3-6 months and are going through legal action, that 80% could very well become 100%. And, the bank might get their money back or they might slightly not. There are legal costs, no bank ever wants to do that to people, which is why they go to so much trouble in the first place to assess your capacity, your character, and your history. No bank wants to sell anybody up, it’s a last resort and a lose-lose for everybody.
I was in the bank, I’ve worked for four banks in my time. It was never nice. My boss actually instructed me to issue the warnings to people as a learning experience for me. I was in my twenties and dealing with people in tears. It makes you responsible and once you start having your own Australian Credit License, I certainly go back to those days and see why these rules exist. I kind of went on too far just then, this is about valuations.
When you’re refinancing a Home Loan or Commercial Loan, it comes down to what the bank’s value is at. So if you got an $800,000 loan but the bank goes and values it as $900,000, well you’re outside the 80% mark and you’re going to have to pay very expensive LMI to be able to move that property. For medical professionals, accountants, professional sportspeople, the banks allocate a 90% LVR with no LMI, so the 80-20 rule becomes 90-10 because they’re considered just a lower risk and more of a stable income. But what you should know about when you come to us, and we send a valuer out is, first of all, there are two kinds of valuations. First, there’s a modelled estimate. We might throw your address in the system and the computer tells us it’s worth $1,000,000. If the loan’s $800,000 don’t bother having the property properly inspected. We agree it’s worth $1,000,000. That’s really handy. Sometimes the modelled estimate valuations can actually give us a better result than if we send a valuer to walk through the property and prepare a full report.
If it does come to the point where we prepare a full report, there are a couple of things to remember. These valuers have a hard time. They don’t walk in there and immediately know what the place is worth. They look at the evidence over the last 3 or 4 months, of directly comparable properties in that area. So, one thing you can do before the valuer comes to your house, if you know that an apartment upstairs or the house down the road just sold for a certain amount and you can see the comparison between that property and your own, have evidence for the valuer. These valuers aren’t paid a great deal per valuation. So, they split out seven or eight of these things a day. They’re in a rush. They haven’t got time to spend all day researching every property in the area. So if you have some evidence of a sale that can help, the valuer will thank you when you give it to him. It’s because when he goes back to the office and starts doing his sums, he can rely on that.
Another thing is that when the valuer comes in, try and tidy up the house a little bit. It’s not massively important but it’s nice to present the property nicely. You’re going to get inside the head of the valuer the same way if he walks in, and gets a nice feel of the property. Sure, they’re numbers people, they’re mathematical and they’ve got their methods. But, like all human beings, when you walk in somewhere and there’s a nice breeze coming through and it’s warm, and sunlight coming through with the shades open, the toilet seat down and the bed made, it does make a difference. One note, most professional valuers won’t take a photo of your bedroom. They’ll take a photo of the lounge room and the bar, they will take a photo of the bathroom. Only the junior brokers don’t know that it’s a little bit uncouth to take photos of people’s bedrooms. You shouldn’t see it as an invasion of privacy. We look through the valuations. We look through the risks if the valuers identify them, like power lines next door, or a fence-line issue, or anything else. No one’s going to look too much into your valuation, but a lot of people really take it to heart.
The other thing is that when we order a valuation from two separate banks, they can be a hundred thousand dollars out. A valuer does not know what your property’s worth. You won’t really know unless you actually put it out to tender or put it to an auction. For a valuer, it’s a guessing game. Like I say, if you can, help the valuer in that way. And if it’s not going to give you the result you need, we can always order a valuation at another bank.
Not too long ago, my assistant and I both ordered a valuation from the same bank for the same property. There was a big variance! We didn’t know that each other had done that and we got two. It does show up on the bank’s system so we had to rely on the lower of the two. But it’s okay, it got it around the corner.
Also, don’t let it mess with your head. Don’t think that a lot of people take it personally. I was moving a $1,000,000 loan for somebody, but instead of the valuation coming in at $2,000,000 it came in at $1,700,000. He was so annoyed that he didn’t proceed with the loan. He was blaming the bank and being so emotionally hurt that somebody said he was only worth $1,700,000. It didn’t make any difference at all to the loan application. The LVR was not an issue, but he was too emotionally involved.
When you’re dealing with the banks or you’re dealing with us, we’re looking at getting you the best financial outcome. Don’t get too emotional about it, it’s a numbers game. We’re here to help you build wealth, tax effectively, and, where we can to provide asset protection and flexibility, And, make you happy! Thanks for watching guys!