How leverage works in real life


Ever been curious? We unveil the mystery and show you exactly how much the bank will own after you’ve refinanced


Consider an example where a would-be investor (Danni) has a property currently valued at $300,000 with a $120,000 loan (therefore $180,000 in borrowable equity). Danni wants to buy an investment property for $350,000 but she doesn’t have a cash deposit. 

Borrowable equity= $300,000 x80%- $120,000=$120,000

Investment property=$350,000

In this instance, the bank will add the total loan amount that Danni requires over the total security she will have. 

So Danni’s total loan will be her $120,000 existing mortgage plus $380,000 for the purchase price ($350,000 and $30,000 for costs) of the investment property (of course we would split these loans out to avoid cross-securitisation but for the sake of simplicity, let’s ignore this for a moment). In other words, Danni’s borrowing more than the total cost of his new investment property and increasing her overall borrowing to $500,000. 

New borrowing= Existing loan + Investment property value + cost

New borrowing= $120,000 + $350,000 + 30,000= $500,000

Loan to value against investment property= total borrowing/property value x100

New loan to value ratio=$380,000/$350,000=109%

At the same time, the total value of the property the bank will be holding as security is $650,000 (Danni’s home worth $300,000 and the investment property worth $350,000). Therefore, the LVR is calculated by dividing $500,000 (total borrowings) by $650,000 (total security), making Danni’s total LVR just under 77%. 

Total security held by the bank= existing property + new investment property

Total security held by the bank= $300,000 + $350,000= $650,000

Total loan to value ratio= total borrowing/total security x100%

Total loan to value ratio=$500,000/$650,000=77%

So although Danni has borrowed 109% of the new investment property’s value (being the price plus costs), the equity in her existing home reduces her overall LVR and provides the bank with ample security.

Whether you are looking to buy your first home, move home, refinance, or invest in property, a mortgage broker can help. Access loans from all the major lenders, get help with paperwork – plus there is no charge for this service. Get help from a local mortgage broker

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