You might be thinking that renewing your loan is an odd idea if you already have plenty of equity due to capital gains. However, there is one single acronym that will change your mind: LVR, or loan-to-value ratio.
Have you calculated your new LVR lately?
What is my LVR?
This ratio is what lenders use to help them decide all sorts of aspects of your finance, whether it’s interest rates, securities or whether they give you a loan at all! It is calculated by dividing the current balance of your loan by the value of your property to get a percentage.
For example, let’s say you bought a property in Sydney for about $800,000. You put down your 20 per cent deposit of $160,000 and got the rest through a loan: $640,000. So your LVR is $640,000 divided by $800,000, or 80 per cent. If you have put down a 30 per cent deposit, it would be 70 per cent.
The more money you have sunk into the property, the more likely you are to keep making repayments as you have more to lose if you fail to maintain repayments.
Appreciating property gets better LVR
With the right advice, you could discover some serious benefits.
So after such an excellent year for property, with CoreLogic RP Data reporting cities like Melbourne and Sydney seeing nearly 11 per cent value gains over the year, why would you want to refinance?
Over that time, not only would you be paying off your mortgage, but your property would be appreciating value as well, chopping at your LVR from both ends. Let’s say you bought that Sydney property at the end of January 2015. For the sake of argument, we will say you paid exactly the value of the property at $800,000 with a 20 per cent deposit.
CoreLogic data states that your property would now be worth about $880,000, assuming median growth of 11 per cent. Let’s say you’ve also paid off $40,000 from your principal too: $600,000.
Now your LVR is $600,000 divided by $880,000: 68 per cent. That is a huge drop, and by refinancing your loan, you could be accessing a better interest rate as a result.
You also have to consider how your current interest rate affects your loan balance and what it may ultimately cost to refinance. However, with the right advice, you could discover some serious benefits.
If you’ve seen big gains in your property this year, it might be time to consider unlocking that equity with a refinance. Find out more by talking to me today.