Loan To Value / Debt to equity ratios

[orion]

I'm doing another article, this one is on LVRs and would like a bit of feedback on what some of the common questions people might have about this. Your questions/comments will hopefully help me write it so it helps answer other people's questions.

Also, any ideas for other articles you have would be good, thanks.

Graeme

[andyp2010]

At what lvr, residentially, do you become practically immune to the bank calling it in when values drop? Obviously 0 is the ideal but its not like theyre going to call in loans of 30%lvr either. 60? 70?

[marklowes]

If payments are being made a bank may even allow lvr of over 100% (i.e neg equity), as was common in states which lead to ppl walking away which added to price falls.

I would imagine so long as payments being made banks would let lvr creep over 80% as prices fall; anyone experience a loan recall due to falling property value despite comfortable servicing ability during last down turn?

[Nick G]

It would be worth highlighting the impact of the changes where banks are less flexible/able to lend against flats (commercial) on future residential.

I got stuck this year borrowing for something where I had 4 flats with 50% LVR but while the bank looked at the debt they said as of the new LVR rules they wouldn't consider the equity as an asset in my position. Bloody annoying because I'd owned them for years and borrowed against them many times in the past. I sold the flats, I could have refinanced them into another bank as well.

[orion]

It would be worth highlighting the impact of the changes where banks are less flexible/able to lend against flats (commercial) on future residential.

I got stuck this year borrowing for something where I had 4 flats with 50% LVR but while the bank looked at the debt they said as of the new LVR rules they wouldn't consider the equity as an asset in my position. Bloody annoying because I'd owned them for years and borrowed against them many times in the past. I sold the flats, I could have refinanced them into another bank as well.

Thanks everyone, all good comments and questions so far.

[The_Dog]

I think any comments regarding 'Banks calling in loans' or 'people walking away' need to be in context of the country where it happened. I have had loans called in, but not in NZ. I believe 'walking away' from neg equity is only possible under US law.

My thoughts are not so much questions, but comments. It would be useful for people to be aware just how equity can swing. My experience is going from 60% pre GFC to 80%+ and in a whole lot of trouble in 07/08. Not only did house prices come down, but I had to borrow more just to keep up with interest payments (some near 10%) and maintenance, so it's a double whammy, loans go up, values comes down.

I'm now at 42% or something, portfolio in a lot better condition (maintenance / decorative reno wise), stable tenants, things humming along. Not tempted to access the equity this time around as I've experienced how 'apparent' positive Equity and Cashflow can very quickly swing to negative.

TD

[donna]

What are the triggers for banks to call in loans? Do they call in commercial then residential and target investors before owner occupiers? Or is everyone fair game?

[orion]

I think any comments regarding 'Banks calling in loans' or 'people walking away' need to be in context of the country where it happened. I have had loans called in, but not in NZ. I believe 'walking away' from neg equity is only possible under US law.

My thoughts are not so much questions, but comments. It would be useful for people to be aware just how equity can swing. My experience is going from 60% pre GFC to 80%+ and in a whole lot of trouble in 07/08. Not only did house prices come down, but I had to borrow more just to keep up with interest payments (some near 10%) and maintenance, so it's a double whammy, loans go up, values comes down.

I'm now at 42% or something, portfolio in a lot better condition (maintenance / decorative reno wise), stable tenants, things humming along. Not tempted to access the equity this time around as I've experienced how 'apparent' positive Equity and Cashflow can very quickly swing to negative.

TD

Yes definitely, that is one of the things I was going to mention re changes in your own LVR and often how you won't even know it.

[Damap]

I think any comments regarding 'Banks calling in loans' or 'people walking away' need to be in context of the country where it happened. I have had loans called in, but not in NZ.

They called in truckloads of loans in the GFC. Put a lot of people under.

[motoman]

lol and that was a true save the investors cover up, imagine whats going to happen when they cant put the mascara on this next one.

when i think of LVR it reminds me of uni and bcom, i think relating LVR back to business and having debt to equity ratio, what is the ideal situation from holistic company funding perspective and why and can this change in different cycles of an industry (in this case market)

this is kind of why i find it odd people dont LVR at 50%, perhaps they have either not run a business or they have not experienced interest rates exceeding 10% (if not 18% )

[snobilo]

Would interest rates creep up to what they have been in the past though? I hear of people who "back in the day" bought houses in devonport for $100,000 but interest was at 34%...rates like that would destroy home ownership in NZ.

[Glenn]

I read with amusement comments like banks do not call in loans in NZ. I can assure you they do. A couple of years ago they did it to me in a commercial syndicate I am in. Investment started off at less than 50% LVR but a large multi floor tenant moved out after a few years along with a few other tenants and the building value dropped. The bank asked us to stump up with another million $. They have been fairly patient with us and have let us pay it off. Not good suddenly having the monthly payout drop to zero for a little while! We now have the whole building re let and things are looking good again.
My little hiccup brings me to a significant controversial issue of LVR's and mortgages. When things were going good and the syndicate was paying out 12% net after management we thought we were bullet proof. The wisdom of the accountants was to not pay down the principle. We could have been doing that when things were good and we possibly might never have been asked for the $ when we hit some rough water. I do not follow the general wisdom of other investors and always strive to pay down mortgages at the fastest rate I can. This strategy has always served me well even if it did mean I had to put off some off spending big on life's pleasures. Perhaps others might like to comment on my non orthodox approach.

[andyp2010]

I read with amusement comments like banks do not call in loans in NZ. I can assure you they do. A couple of years ago they did it to me in a commercial syndicate I am in. Investment started off at less than 50% LVR but a large multi floor tenant moved out after a few years along with a few other tenants and the building value dropped. The bank asked us to stump up with another million $. They have been fairly patient with us and have let us pay it off. Not good suddenly having the monthly payout drop to zero for a little while! We now have the whole building re let and things are looking good again.
My little hiccup brings me to a significant controversial issue of LVR's and mortgages. When things were going good and the syndicate was paying out 12% net after management we thought we were bullet proof. The wisdom of the accountants was to not pay down the principle. We could have been doing that when things were good and we possibly might never have been asked for the $ when we hit some rough water. I do not follow the general wisdom of other investors and always strive to pay down mortgages at the fastest rate I can. This strategy has always served me well even if it did mean I had to put off some off spending big on life's pleasures. Perhaps others might like to comment on my non orthodox approach.

Yes, I'm in full agreement about paying loans off or preferably have an offset mortgage. There's no point exposing yourself to more risk for a bit of a tax saving. Someone I read once put it succinctly as 'You can't deduct your way to wealth'.

Is calling loans in only a problem for an investor within commercial lending or have you heard of it happen to residential investors too?

[Glenn]

Yes, I'm in full agreement about paying loans off or preferably have an offset mortgage. There's no point exposing yourself to more risk for a bit of a tax saving. Someone I read once put it succinctly as 'You can't deduct your way to wealth'.

Is calling loans in only a problem for an investor within commercial lending or have you heard of it happen to residential investors too?

The commercial world is very different from residential. Commercial properties are generally valued on earnings and tenants can be hard to find at times.
Residential properties, even blocks of flats are much more influenced by other things. Not that I have taken any notice of normal valuation practices with my purchases in the last 5 years or so.
I have managed a few properties where the owners have not been paying. The banks have always been keen to talk to me the manager and we have always co operated with them. These problems were always related to external issues and not the rent flow. I regret not stepping up to the mark in each of these cases and offering to buy the properties myself. I could have picked up some great bargains. Generally the banks have sold the properties at a bit of a discount to market in order to solve their problem. Selling a mortgaged property is of course very different from asking for some principle to be paid off. So to answer your question I have no experience of banks asking for more principle to be paid off but I am sure it could happen. The reality is there is less likely hood of a residential investor being able to pay because they tend to have higher LVR's.

[Nick G]

How did the syndicated purchase of the commercial come together, if you don't mind me asking? Was it people you knew who pooled on a property?

I've done a group investment as a LLP. It's interesting to hear about how others approached it.