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
The deposit is $97,500 (15% of $650,000), so the loan is $552,500, and $552,500 ÷ $650,000 = 85%. When the deposit and the LVR are measured against the same value, LVR is simply 100% minus the deposit percentage.
Why the Other Options Are Wrong
Option A: 82%
82% would mean an 18% deposit; a 15% deposit leaves 85% of the price to borrow.
Option C: 88%
88% would mean a 12% deposit, not the 15% the couple has.
Option D: 90%
90% would mean a 10% deposit; their 15% deposit gives a lower LVR.
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 is the loan divided by the property's value (banks use the lower of price and valuation). The Reserve Bank restricts high-LVR lending: owner-occupier lending above 80% LVR and investor lending above 70% LVR are limited to a small share of each bank's new lending. Higher LVRs often carry a low-equity margin or fee.
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:
More Finance Questions
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When assessing a mortgage application, which factor is typically given the highest priority by New Zealand lenders?
James has been contributing to KiwiSaver for 4 years and wants to withdraw funds for his first home. His KiwiSaver balance is $45,000, but $15,000 consists of government contributions and employer matching. What is the maximum he can withdraw for his house deposit?
What is the main advantage of a table mortgage compared to an interest-only mortgage?
- → What is the maximum amount a first home buyer can withdraw from their KiwiSaver account for a house deposit?
- → What does LVR stand for in New Zealand mortgage lending?
- → What is the key difference between a table mortgage and an interest-only mortgage in terms of monthly payments?
- → A bank checks how much of a borrower's gross income would go on debt repayments. The borrower earns $80,000 a year, already pays $800 a month on other debts, and the new mortgage would cost $2,200 a month. What share of gross income would the repayments take?
- → Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?
- → A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
- → Which of the following is NOT typically considered by banks when assessing lending criteria?
- → How long must a KiwiSaver member have been contributing before they can withdraw funds for their first home?
- → Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
- → A borrower took out a $400,000 mortgage and has paid $2,200 every month for five years. The balance owing is still exactly $400,000. Which repayment structure is this most likely to be?
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