A couple with a combined income of $120,000 wants to buy their first home for $650,000. They have a 15% deposit. What is their LVR?
Correct Answer
B) 85%
With a 15% deposit on a $650,000 property, they have $97,500 deposit and need to borrow $552,500. The LVR is calculated as loan amount divided by property value: $552,500 ÷ $650,000 = 85%.
Why This Is the Correct Answer
Option B (85%) is correct because the LVR calculation is straightforward: loan amount divided by property value. With a $650,000 property and 15% deposit ($97,500), the loan amount is $552,500. Therefore: $552,500 ÷ $650,000 = 0.85 or 85%. This represents the percentage of the property value being financed through borrowing, which is the standard definition of LVR used by New Zealand banks and the RBNZ.
Why the Other Options Are Wrong
Option A: 82%
82% is incorrect as it doesn't match the mathematical calculation. This might result from incorrectly calculating the deposit amount or loan amount, or from rounding errors in the computation.
Option C: 88%
88% is too high and suggests an error in calculating either the deposit amount or the resulting loan amount. This could occur from miscalculating 15% of $650,000.
Option D: 90%
90% would indicate only a 10% deposit, not the 15% stated in the question. This represents a fundamental misunderstanding of the deposit percentage given.
Deep Analysis of This Finance Question
Loan-to-Value Ratio (LVR) is a fundamental lending metric that measures the percentage of a property's value that is being borrowed. This calculation is crucial for both lenders and borrowers in New Zealand's property market, as it directly impacts lending decisions, interest rates, and regulatory compliance. The Reserve Bank of New Zealand (RBNZ) uses LVR restrictions as a macroprudential tool to manage financial stability risks. Understanding LVR calculations is essential for real estate agents as it affects client eligibility for mortgages and influences property purchase decisions. The calculation involves dividing the loan amount by the property's value, expressed as a percentage. This metric helps lenders assess risk - higher LVRs indicate greater risk as borrowers have less equity in the property.
Background Knowledge for Finance
LVR (Loan-to-Value Ratio) is calculated as the loan amount divided by the property's purchase price or valuation, whichever is lower. In New Zealand, the RBNZ implements LVR restrictions to maintain financial stability. Currently, most owner-occupier first home buyers need at least 10% deposit (90% LVR maximum), while investors typically need 35-40% deposits. Banks use LVR to assess lending risk and determine interest rates. Lower LVRs generally qualify for better interest rates. Real estate agents must understand LVR calculations to properly advise clients on financing options and property affordability.
Memory Technique
Remember: LVR = 100% minus deposit percentage. If someone has a 15% deposit, their LVR is 85% (100% - 15% = 85%). Think of it as 'flipping' the deposit percentage to get the loan percentage.
When you see any deposit percentage in an exam question, immediately subtract it from 100% to get the LVR. This quick mental flip saves calculation time and reduces errors.
Exam Tip for Finance
Always identify the deposit percentage first, then subtract from 100% to get LVR quickly. Double-check by calculating loan amount ÷ property value if time permits.
Real World Application in Finance
A real estate agent is working with first-time buyers who have saved $130,000 for a deposit on an $800,000 property. The agent calculates their LVR as 83.75% ($670,000 loan ÷ $800,000 = 83.75%), which exceeds the typical 80% threshold for standard lending rates. The agent advises them they may face higher interest rates or need to consider a lower-priced property to improve their LVR and secure better lending terms.
Common Mistakes to Avoid on Finance Questions
- •Confusing deposit percentage with LVR percentage
- •Calculating LVR as deposit amount divided by property value
- •Using gross income instead of focusing on deposit and loan amounts
Related Topics & Key Terms
Key Terms:
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