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Why is the Loan to Value Ratio (LVR) so important when you are financing your property?

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Firstly, what is the LVR?

The Loan to Value Ratio (LVR) is the amount you are borrowing, represented as a percentage of the property value. For example, if you are considering a loan of $400,000 and the property is worth $500,000 the LVR is 80%.

Why is the LVR important when you are considering the finance of your property?

All Lenders in Australia are currently very keen to lend you money to assist you with the purchase of your home, investment or commercial property. It is a very competitive market. However, the higher the LVR, the greater the risk for the Lender (and you).

Let’s consider three types of property lending:

  1. Residential Property (owner occupied and investment)Most lenders are comfortable to lend you up to an 80% LVR. Many will also lend above 80%, however, once the LVR increases above 80% the lender must seek further approval from the Mortgage Insurer. If your application is subsequently approved the Mortgage Insurer will charge you a once only (but costly) insurance premium. This insurance protects the Lender (not you) if the Lender needs to sell your property to recover your loan, and your property value has decreased. So, whilst it is possible to borrow up to 95% LVR the exercise can be very expensive. Additionally, most Lenders are happy to discount/decrease their interest rates if the LVR is 75% or below.
  2. Commercial Property (owner occupied and investment)Most commercial Lenders are usually comfortable to lend up to 65% LVR, with some happy to provide up to 75%. The reason you cannot borrow to 80% on commercial property is that Lenders consider the prospect of selling a commercial property to recover the loan as a greater risk to them (and you), than for residential property.
  3. Self-Managed Super Fund Lending (SMSF – Residential and Commercial)Buying property in your super fund is more complex, but a growing area of wealth creation. Many SMSF Lenders will lend up to 80% LVR (maximum) for residential property and 65% LVR (maximum) for commercial properties.

In summary, the more contribution you can provide to the purchase of your particular property the easier and cheaper the finance will be – simply as it helps to reduce the overall risk for the Lender and you.

Self Managed Super Fund Loans

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Self-Managed Super Fund (SMSF) Borrowing – Peter Reber – First Point Group

Like other superannuation funds, SMSF’s are primarily used to build wealth for retirement. SMSF’s are different from other superannuation funds as all members are also trustees (or trustee directors, if the SMSF has a corporate trustee). Members are responsible for running the fund including the documented strategy for investing the fund’s assets, paying benefits and meeting the administrative and compliance requirements of the fund.

Changes to the Superannuation Industry (Supervision) Act 1993 (Cwlth) and Regulations (SIS Act) during late 2007 allow SMSF’s to borrow money from a Lender to purchase investment assets such as residential & commercial property. This ability to borrow can build on the taxation advantages currently available to superannuation funds (refer to your Accountant) and can help a fund to acquire a larger and more diversified portfolio of investments with a view to successful long term wealth accumulation.

Since early 2008, First Point Group has completed many successful SMSF Loan/Borrowing transactions with Lenders to assist clients in this rapidly growing area including:

  • Purchase of an owner occupied commercial building
  • Purchase of a waterfront investment home
  • Purchase of three residential townhouses
  • Purchase of a factory from a related family trust

It is important to note that the ATO have recently advised (9/2011) that SMSF’s will be able to improve properties held within funds, provided that borrowings are not used to renovate. You will need to speak to your Accountant to understand the full ATO implications of this change.

Please contact Peter, Simon or David from First Point Group on 9882 2500 if you would like to learn more about borrowing using your Self-Managed Super Fund.

Award Winning Team

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First Point Group won this years 2012 FAST Group Operator of the Year Award.

Our wide range of mortgage lenders allows us to match your specific needs to the right home loan

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Our wide range of mortgage lenders allows us to match your specific needs to the right home loan.