A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
Correct Answer
B) 83.3%
LVR is calculated as loan amount divided by property value. The loan amount would be $500,000 ($600,000 - $100,000). $500,000 ÷ $600,000 = 0.833 or 83.3%. This exceeds the standard 80% LVR limit for most lending.
Why This Is the Correct Answer
The loan is $600,000 − $100,000 = $500,000, and $500,000 ÷ $600,000 = 0.833, an LVR of 83.3%. LVR always divides the loan, not the deposit, by the property value.
Why the Other Options Are Wrong
Option A: 80.3%
80.3% does not follow from the figures; $500,000 ÷ $600,000 is 83.3%.
Option C: 85.7%
85.7% divides the loan by $583,000 or so, not by the $600,000 value.
Option D: 90.0%
90% would need a $540,000 loan, meaning a $60,000 deposit rather than $100,000.
Deep Analysis of This Finance Question
Loan-to-Value Ratio (LVR) is a fundamental lending metric that measures the proportion of a property's value being financed through debt. In New Zealand, LVR restrictions were introduced by the Reserve Bank to manage financial stability and housing market risks. The calculation is straightforward: divide the loan amount by the property's value. This question tests understanding of basic mortgage mathematics, which is essential for real estate agents advising clients on financing options. LVR limits directly impact buyer eligibility and deposit requirements. Most New Zealand banks have an 80% LVR limit for standard lending, with higher LVRs requiring mortgage insurance or falling under speed limits. Understanding LVR calculations helps agents assess client financing capacity, explain deposit requirements, and identify potential lending challenges early in the transaction process.
Background Knowledge for Finance
LVR (Loan-to-Value Ratio) measures lending risk by comparing loan amount to property value. In New Zealand, the Reserve Bank introduced LVR restrictions following the Global Financial Crisis to maintain banking stability. Standard residential lending typically requires LVRs below 80%, with higher ratios subject to speed limits or requiring mortgage insurance. The Property Law Act 2007 governs mortgage security interests, while the Credit Contracts and Consumer Finance Act 2003 regulates responsible lending practices. Real estate agents must understand LVR calculations to advise clients effectively on financing options and deposit requirements.
Memory Technique
Think of LVR as 'how much of the pie the bank owns.' If the property is a $600,000 pie and you put down $100,000 (keeping that slice), the bank gets the remaining $500,000 slice. The bank's slice ($500,000) divided by the whole pie ($600,000) = 83.3%.
When you see LVR questions, visualize the property as a pie. The deposit is your slice, the loan is the bank's slice. Calculate the bank's percentage of the whole pie using: loan amount ÷ property value.
Exam Tip for Finance
Always identify: loan amount = property value minus deposit. Then divide loan by property value. Double-check by ensuring deposit percentage plus LVR equals 100%.
Real World Application in Finance
A first-home buyer approaches you about a $600,000 property with $100,000 saved. You calculate their LVR at 83.3%, exceeding the standard 80% limit. You explain they'll need either a larger deposit to reach 80% LVR, mortgage insurance, or a lender offering higher LVR lending. This calculation helps set realistic expectations and guides them toward appropriate financing solutions before making offers.
Common Mistakes to Avoid on Finance Questions
- •Dividing deposit by property value instead of loan amount
- •Forgetting to subtract deposit from property value to get loan amount
- •Confusing LVR with deposit percentage
Related Topics & Key Terms
Key Terms:
More Finance Questions
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What is a key advantage of a revolving credit mortgage facility?
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?
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- → 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?
- → 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 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?
- → 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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