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.