- Hey, it's Connie from Prosperity Finance.
I hope everything's well with you and your family.
Now, last week Reserve Bank has officially
removed the LVR restriction.
That means the bank no longer need to comply
with the LVR rule at least for the next 12 months.
Now after announcements,
we have a flood of inquiry asking now LVR is gone,
so, can I borrow more?
How much more can I borrow?
Now I thought that's a really important topic.
I'd like to take this opportunity
to share with you about this.
Firstly, let me clarify.
So at the moment bank hasn't really taken action yet.
Reserve Bank doesn't require LVR,
doesn't mean the bank doesn't have LVR rules.
Now, I don't think bank will completely forgive deposits
otherwise there will be bad debts,
cause bank can't recover the debt in a case
that the property has to go through mortgagee sell
if they lend 100%.
So, it won't be completely remove LVR,
but we don't know when they're going to take action.
Now, I guess there's two reasons
that we haven't seen any changes.
Number one is into the current Covid environments,
people's income are not very stable,
and in some cases, the income has been reduced.
So bank already exposed to higher risk,
so if they increase LVR,
is actually increase the risk even further.
So I think the timing probably is not ready.
Now the second thing is for any major policy changes,
bank need to think about carefully
how they going to response,
and then they also need
to adjust their system policy, everything,
so it's going to take time.
So that's probably the other reason hasn't happening,
but we will make sure that anything
that we hear will give you an update immediately
and share with you in terms of the impact.
Today I want to spend a bit of time just talking about
what if LVR does relax a bit,
how that going to impact your borrowing capacity,
because that's the common ask question in the moment.
So, firstly, want you clarify
in terms of borrowing capacity,
actually driven by two important factors.
Number one is the capacity come from your income,
we call it servicing.
So that means your repayment ability,
you know how much net income do you have
to service the loan.
So that's driven by your income,
and that income can include your job income,
your business income,
your rental income,
and if you have a border in your home,
the border income also will be taken into account.
And also, if you have subsidy from government,
for example, Family Tax Credit,
that will be included as well.
Now, obviously, the bank wants to know after tax income,
and apart from leaving,
that's the disposable income you can use to repay the loan.
So that's really critical factor.
Now, if you can't pass that the bank won't give you money
even though you have low deposit,
cause bank has to follow a Responsible Lending code.
So what the Responsible Lending code says is that,
you can only lend to a customer
if they can demonstrate the ability to repay.
So that's why the bank wants to make sure you can repay,
not just be safe and take your property,
that's not the end game.
Now, the second factor that drive your borrowing capacity,
is actually to do with a deposit and LVR.
So for example, at the moment,
let's say you have 200K deposit
and LVR for first home buyer is 80%.
So, that means bank only required 20%
and in this case, you already have 200K,
that means you can borrow 800K
to buy a million dollar home because you have 20% deposits.
Now, if your deposit increase, or LVR increase or decrease,
that will affect the capacity right?
So that's the LVR driven.
So should bank, in a relaxed LVR,
you can only borrow more
if your LVR capacity at the moment is weaker.
Now by increasing LVR,
your LVR capacity will be increased, right?
So, if your LVR capacity is weaker,
then the servicing capacity,
then LVR increase would increase your borrowing capacity.
Now, on the other hand,
if the servicing side by your income
is weaker than LVR capacity,
then it doesn't matter how bank relax LVR,
your borrowing capacity won't change.
So it's really important to understand, which is weaker
if it's LVR side, yes
LVR increase will increase your capacity,
otherwise it won't.
So it may not sound very clear,
so I just thought it would be better,
if I can use a case study to illustrate
what I just said,
and I'll use two examples.
The first one would be,
the income side is a bit weaker,
and the second example is the LVR capacity is a bit weaker,
so we can see the difference.
So let me go to my white board.
Now in this example,
let's assume you want to buy a million dollar home,
and you have 250K deposit,
now you're looking to buy or borrow 750K, right?
Now after assessment,
we find out that in terms of income,
you can service seven, sorry the 650K,
let's say that's the results.
That's based on income and look at the LVR capacity.
So let's say we have 250K deposit,
and at the moment bank only require 20% deposit
and they willing to lend you 80%, okay?
Now in this case,
your LVR capacity will be a million dollar, right?
So that means you can buy up to 1.25 mil property
and you have 20% deposit.
So the LVR capacity will be 1,000K
or a million dollars.
So in this case, a servicing is weaker than LVR,
so the borrowing capacity will be based on the servicing,
so that's 650K, right?
So even though you have more than enough deposits,
but the bank won't lend you more,
because you can only service 650K.
So in this case,
the budget would be,
250K plus 650K equals 900K.
Now lets say the LVR now increased from 80% to 90%,
what does it mean?
So let's make a change.
So that changed to 90%,
and we only need 10%.
So, that means the LVR capacity would also increase,
that would increase to 2.25 mil, right?
So if you buy a property up to 2.25 mil,
you already had 10% deposits, and you borrowing 80%,
which is 2.25 mil.
So here, I'm going to change that to two, two, five, zero.
Now, between the two numbers,
your servicing is still weaker,
so the borrowing capacity is still 650K.
That doesn't change the borrowing capacity,
therefore it doesn't change your budget.
So this is example where the income side
or the servicing side is weaker than the LVR side.
Therefore by increasing LVR,
that doesn't really make any changes
to your borrowing capacity or budget, right?
Let's look at another example.
Now, in this case,
you're also looking to buy a million dollar home,
but you only have 50K.
It's really difficult
to save in the current environment, right?
But in this case,
I also change your income level,
let's say you can afford,
your income can afford 950K.
Whoops, sorry.
So 950K is your income borrowing capacity.
Now, what is the LVR set capacity?
So 50K divided by 20% deposit requirements time by 80%,
so that equals 200K.
That means you can buy property up to 250K
and you have the 20% deposit
and the bank will lend you 200K,
which is the equivalent 80%.
So, in this case the LVR capacity is 200K.
Now, between the servicing and LVR,
LVR capacity is weaker, so the borrowing is 200K.
Now, in terms of the budget,
you have 50K deposit plus 200.
That's only 250K,
that can't buy anything, right?
So, what if we change the LVR
to say 90%
or 95 for example,
and you only need 5% for deposit.
Now, in this case, you can borrow 950K based on the LVR,
because you buy a million dollar house
and you only need 50K, which is about 5%.
So, that would significantly increase the LVR capacity
to 950K as well,
so the borrowing will be the lower of the two,
in this case they are the same, so 950K.
Now, we can significantly increase
the borrowing capacity to 950K,
and the budget to a million dollar.
As you can see in this example,
if your LVR side of capacity is weaker
and bank increase LVR,
then it will significantly increase your borrowing capacity
therefore, increase your budget,
whereas in the last example, it doesn't change.
Okay, so hopefully by using these two examples
that help you understand how the LVR rule,
if that's changed, increase LVR?
How does it affect your borrowing capacity?
So, it really depends
with what your current situation,
is your LVR side is weaker,
or the serving side of capacity is weaker.
If it's LVR side is,
LVR will change will help you borrow more.
I hope that helps you clear the maths
if you have any question, please feel free to contact us.
I'm more than happy to provide a personalized solution,
that help you to review
what are the opportunity for you going forward.
Thank you so much for watching,
if you like our video, please subscribe.
Over youtube channel every week,
we have great content to share with you.
Thank you, I'll see you next time.
Bye.