Sarah earns $80,000 annually and has saved $50,000 for a house deposit. She wants to buy a property for $400,000. What LVR would this represent?
Correct Answer
A) 87.5%
LVR is calculated as loan amount divided by property value. Sarah needs to borrow $350,000 ($400,000 - $50,000 deposit). $350,000 ÷ $400,000 = 0.875 or 87.5%. This exceeds the standard 80% LVR restriction for owner-occupiers.
Why This Is the Correct Answer
Sarah must borrow $400,000 − $50,000 = $350,000, and $350,000 ÷ $400,000 = 87.5%. That is above 80%, so the loan falls in the restricted high-LVR share of owner-occupier lending.
Why the Other Options Are Wrong
Option B: 85.0%
85% would mean a $340,000 loan; Sarah needs to borrow $350,000.
Option C: 80.0%
80% would need an $80,000 deposit; she has only $50,000.
Option D: 12.5%
12.5% is her deposit share of the price; LVR measures the loan share.
Deep Analysis of This Finance Question
This question tests understanding of Loan-to-Value Ratio (LVR), a critical concept in New Zealand property finance. LVR represents the percentage of a property's value that is being borrowed, calculated by dividing the loan amount by the property value. In this scenario, Sarah's $50,000 deposit against a $400,000 property means she needs to borrow $350,000. The LVR calculation ($350,000 ÷ $400,000 = 87.5%) demonstrates she exceeds the Reserve Bank of New Zealand's standard 80% LVR restriction for owner-occupiers. This connects to broader prudential lending requirements designed to maintain financial stability and reduce systemic risk in the housing market. Real estate agents must understand LVR calculations to properly advise clients on financing options and potential lending restrictions.
Background Knowledge for Finance
LVR (Loan-to-Value Ratio) measures lending risk by comparing the loan amount to the property's value. In New Zealand, the Reserve Bank sets LVR restrictions to maintain financial stability. Standard limits are 80% for owner-occupiers and 70% for investors, though some exceptions exist. The calculation is: (Loan Amount ÷ Property Value) × 100. Higher LVRs indicate greater lending risk. Real estate agents must understand these calculations to advise clients on deposit requirements and potential lending challenges under current RBNZ restrictions.
Memory Technique
Think of the property value as a whole pizza. The loan is the slice you need to 'borrow' from the bank, while your deposit is the slice you already own. LVR measures how big the borrowed slice is compared to the whole pizza. If you own a small slice (deposit) and need to borrow a big slice (loan), your LVR percentage will be high.
When you see LVR questions, visualize the pizza: identify the whole pizza (property value), subtract your owned slice (deposit) to find the borrowed slice (loan), then calculate what percentage the borrowed slice represents of the whole pizza.
Exam Tip for Finance
Always identify three numbers: property value, deposit amount, and loan amount (property value minus deposit). LVR equals loan amount divided by property value, converted to percentage. Double-check your calculation matches one of the given options.
Real World Application in Finance
A first-home buyer approaches you wanting to purchase a $500,000 property with a $75,000 deposit. You calculate their LVR as 85% ($425,000 loan ÷ $500,000 = 85%), which exceeds the 80% threshold. You advise them they'll need either a larger deposit, a cheaper property, or to seek lending through the small percentage of high-LVR lending banks are permitted under RBNZ speed limits. This knowledge helps you provide realistic expectations about their financing options.
Common Mistakes to Avoid on Finance Questions
- •Confusing deposit percentage with LVR percentage
- •Using deposit amount instead of loan amount in the calculation
- •Forgetting to convert the decimal result to a percentage
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?
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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?
- → 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 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?
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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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Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?