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:
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.
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