Loan-to-valuation ratios decreasing according to new Index

Australians are contributing more equity into residential property purchases, according to the new application Loan-to-Valuation Ratio index from credit information provider Veda and property analysts CoreLogic.

The national average of application loan-to-valuation ratio (LVR) across Australia sits at 74.3%[1]. This is despite property values across capital cities rising by 7.% year on year. This decrease in LVR could be attributed to the strong residential property market as rising prices increase the amount of equity held by those who have retained property throughout the boom[2].

The current application LVR is significantly lower than its peak of 78.9% in 2013, but is still higher than 2011 (72.6%)[3].

Tim Lawless, Head of Research at CoreLogic Asia Pacific, said the level of application LVR is an indicator of prudent lending standards and financial stability. “Regulators and policy makers are likely to see the lower application LVR as a positive outcome, which is reflective of a more considered and prudent lending regime,” Mr Lawless said.

“One of the factors contributing to lower application LVRs is the heightened risk assessment many lenders are applying to select housing markets, whereby larger deposits are required to offset higher lending risk. Markets where dwelling values have shown substantial and rapid growth, where supply levels are high, or markets with disproportionate exposure to singular industries, such as mining towns, are typically being assessed by lenders as higher risk. Lenders in these markets are demanding lower LVRs to help minimise their own risk,” Mr Lawless added.

The impact of lower LVRs is also being felt in the mortgage insurance industry. Leading Lenders Mortgage Insurance (LMI) provider Genworth Financial recently published its quarterly update, with new insurance written by the company falling over 28% in the third quarter of 2016[4].

Much has been made in the media of the tightening of lending requirements from the big banks. The AFR published an article last month that included National Australia Bank’s “confidential borrowers’ blacklist,” a list of postcodes in which LVRs for development and investment loans are capped at 70-80%[5].

This in turn has created a gap in the market for alternative financiers such as Trilogy Funds to provide funding for quality smaller developments.

At Trilogy Funds, any project funded must satisfy a strict lending criteria, including a maximum LVR of 70% on an “as if complete” basis. However, over the past six months it has averaged 61.25% to 30 September 2016 (see important information). Trilogy Funds’ LVR criteria allows us to identify developers who are prepared to contribute equity to a project, and this, combined with our strategy of lending in growth corridors, limits the Trust’s exposure to risk.

The adherence of the borrower to Trilogy Funds’ requirements is monitored throughout the life of the loan. Our active oversight is a heavily managed process to ensure that all projects are being run efficiently and in accordance with the lending criteria.

Access our loans overview brochure for more information on our loans and lending criteria.

Disclaimer: While every effort is made to provide accurate and complete information, Trilogy Funds Management Limited does not warrant or represent that the information in this article is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Trilogy Funds Management Limited accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omissions or misrepresentation in information. Note: All figures are in Australian dollars unless otherwise indicated. This information is issued by Trilogy Funds Management Limited (AFSL 261425) and provides general information only. It does not provide financial product advice nor is it an offer of securities. Applications may only be accepted by completing the applicable application accompanying the relevant PDS. If you require personal advice on the suitability or other aspect of this investment, consult a licensed adviser, who will conduct an analysis based on your circumstances. Past performance is not a reliable indicator of future performance. For development and construction loans, the loan-to-valuation ratio represents the maximum loan amount as a percentage of the “as if complete” valuation. Funds advanced for the development properties must not exceed the “as if complete” valuation of the property less the cost (including interest costs) to complete the development as certified by a Quantity Surveyor.