Loan-to-Valuation Ratio Know-How
There has been a lot of talk lately about debt. The media like to tell us how good at borrowing money we have become. In fact, these days it is not uncommon for people to buy a property without saving any deposit at all. They borrow the full amount of the purchase price plus acquisition cost – a loan-to-valuation ratio of over one hundred percent. Is this a good idea
Obviously there is no single answer to this question that works for all people at all times. Those who decide to take the risk of borrowing all the money to buy a house usually do so because it means they can get into the market sooner and so buy at current prices. Their intention is to save money on the purchase price when the market is trending up. If the property market is booming, and prices are rising by the month, those who borrow to buy sooner may soon have a large amount of equity in their property just because of the rate of capital appreciation. If the market is stable, however, this strategy is unnecessary and can put buyers at risk of losing money in the long run.
Buyers whose loan-to-valuation ratio is higher than 85% are usually required to take out mortgage insurance on the basis that ther likelihood of defaulting on the loan is greater.
Of course, a reasonable deposit is safer and is almost always preferred when there is no upward pressure on prices.
There is no ideal loan-to-valuation ratio that will minimize risk while maximizing investment potential at all times and for all people. As with most decisions to be made in the course of buying a property, the risks and benefits associated with high and low loan-to-valuation ratios vary with the state of the property market at the time of purchase.
* The term used to refer to the relationship between the value of the loan and the value of the property expressed as a percentage is loan-to-valuation ratio.
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