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Property Investment Finance Video 4

4. Calculate LVR and Equity

Want to know how to calculate your Loan to Value Ratio and use equity to continue purchasing more property? Here is a quick video to help.

Click Here for video 5: Principal and Interest vs Interest Only Loans

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Transcription:

Just like when you're in the military, the property investment space has got its own jargons and acronyms. One we're going to talk about today is LVR (Loan to Value Ratio) and available equity.

So calculating loan to value ratios. The definition is the ratio or percentage that alone is relative to the value of the property. So let's have a look at how that works now in a simple example. You got a $500,000 house and you got a loan of $400,000 there. The formula is the loan divided by the value times by 100 equals LVR percentage. For example, on this one, you've got 400,000 divided by 500,000 times by 100 equals 80% LVR.

So now let's have a look at a real time example of what's important that you need to know about your LVR and how to put it into play. We're going to talk about available equity. Once again, you've got a $500,000 house over here. You've got a $320,000 loan against that property. What are we going to look at? The total equity available is going to be up to the 100% of the house. However, in most cases, the bank will only allow you to have an LVR limit of 90% of the value of the property. So that's an LVR limit of $450,000 as you can see there. Because they're going to be keeping about five to 10% over there as a security for the property. So they're appropriately protected from that perspective as well.

However, the available equity that you have is the value, minus the loan, minus the security. So on this example, you got a $500,000 house minus $320,000, minus $50,000 equals $130,000 of a valuable equity. And now you can grab that $130,000 and go and take it away and purchase another investment property or put it towards paying off your own home. That's how you use it a smart way as a property investor.

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