Collateral is basically the backing outside of a borrowers personal guarantee which can help a borrower secure loans. It gives the financier the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. For example, car loans are secured by cars, and mortgages are secured by homes.
Loan to Value Ratios (LVR’s) are the amount of your loan compared to the market value of your security, in the mortgage market, this is your property. Usually expressed as a percentage, and calculated by dividing the loan amount by the security value amount.
In the current mortgage market through main-banks for different types of properties (owner occupied and investment – and in other cases commercials) the LVR’s can be different for varying reasons:
- Risk appetite, in some cases these are higher LVR’s due to perceived lower risk depending on the market at the time – for example in some cases lending went higher than 95 or even 100% of the security value, in previous cycles
- Macro-prudential restrictions – the RBNZ for example has put in place a restriction of 60% LVR on investment properties that are already existing
- New-builds are exempt with the aim of assisting our supply issue in NZ
- On owner occupied properties this can be a standard of 80% LVR, and sometimes above this depending on property type and client profile
- Lastly, commercial property can vary depending on numerous factors such as type of property (for example industrial versus office) and also size, price, etc.
The reasoning behind a lot of the LVR’s on different types of property are mainly related to the re-sale amount the bank can reasonably expect should things go wrong. If the bank needs to force-sell a property, their primary concern due to the fact they are risk averse, is can the sale of the property, at minimum, repay the amount they’ve loaned out on it. In this case, the lower the LVR, the safer the bank is.
Furthermore, other issues have become more apparent with lending as of late. Non-compliant properties are something the bank is particularly weary of in this market, along with other factors such as what the property is made of and if there is the tendency for that nature to be leaky, for example. What you want to be doing as part of your due-diligence is understanding that the property is both weather-tight, and compliant in all aspects.
- Particularly with the fact that from an investment point of view, your rental income could be at risk if the latter isn’t the case as we’ve seen in recent events.
- Secondly, you want to be noting that with banks not wanting to fund these properties, in the event you wish to sell, for whatever reason, you may have a smaller pool of potential buyers, which in turn could influence the price you get.
- Lastly, you always want to be checking with the bank that the security is acceptable before you go unconditional. This can be handled by getting the S&P, LIM & Title checked and signed off by the lender, to avoid any nasty surprises.
It’s worth checking with an expert who understands all different banks collateral criteria, to see if there may be a more suitable lender for you. Contact me today for a chat.
Read all about the other C's in this 5 part series:
Part 1 - Character
Part 2 - Capacity
Part 3 - Capital
Part 4 - Collateral
Part 5 - Conditions