How to calculate total portfolio LVR... possibly tricker than you think!

Hi all!

A thought exercise on calculating LVR for ones entire portfolio/position (i.e. sum of all assets vs sum of all debts).

Let's say I have

• $2M of property,
• $1.5M of loans and
• $500k of cash in the bank.

Would my LVR be:

a) $1M ($1.5M loan with $500k paid off) divided by $2M (property value) = 50%
(given I could use the $500k to pay off the loan down to $1M at any time)

or is it

b) $1.5M loan divided by $2.5M (property value + $500k cash asset value) = 60%
(treating the $500k cash as an asset)

or do we treat it as

c) $1.5M / $2M = 75% LVR with $500k cash in the bank
(which naturally sounds much worse)

FMc

 

LVR stands for loan to value ratio. Loan is the loan amount and Value is the security's market value.

From the bank's point of view your LVR is 75%. If you pay down the loan with the $500k then it's 50%.

Option b) is not correct as the cash is not the security for the loan and cannot be considered as part of the Value, otherwise you might as well add in the value of your car, furniture, jewellery etc lol.

 

Easy. Cash comes and goes - you could spend it tomorrow, so doesn't come into it. Loan doesn't change often/much and is a written document. Property doesn't change often/much, but the "value" is a point in time only and does change, though not often (ignore Sydney/Melb in the past years). So 3 is the answer.

LVR really only makes sense in the context of loaning, since that's where it makes a difference - where else does anyone or any organisation ask for your LVR before providing a service? Hairdresser? Insurer? Flying abroad? Nowhere else. Which means whatever you want to use as the definition is fine, but the only definition which matters is the loaning organisations (=3, assuming you are using their valuation and not your own!).

 

Don't confuse LVR with equity.
LVR is literally "loan to value ratio".
The cash isn't securing the loan, and the loan is $1.5mil.

If you have a $1.5ml loan (fully drawn). Property value of $2.0ml And $500k in cash/offset.
Your LVR is 75%
Your equity is $1.0ml (or 40% of $2.5mil)

While you are correct is saying you 'could' repay $500k at any time. You 'could' also go and blow the lot on blow, hookers and pokies at any time.

Blacky

 

The only two variables you need are the loan amount and the property value. Ignore the cash, even if it is in an offset account.

Your LVR is 75%.

 

Point of difference from those above me,
I use a total portfolio LVR as part of my gauge of risk exposure to market,
As I use property secured loans to pay for property expenses and purchase shares, its another metric for me to look at it as a total portfolio.
E.g. $1M prop + $1M shares + $200k cash = 2.2M portfolio,
$1M in debt,
45% LVR (or debt exposure),

But as others have noted, this is for my own planning and SANF, not for bank evaluations.

 

LVR is loan to value ratio.

Very straight forward to work out.

Loan divided by value.

In your case 1.5/2 = 75%

 

Yes, this is where my thinking was as well.

(Using this example) It's one thing to say 'my LVR is 75%', when really, the total debt to asset ratio is 50% (or 60%). It paints a very different picture.

I'm sure some people find themselves in a pretty high LVR in the context of bank lending only, but in a pretty comfortable overall position once cash and other assets are taken into account.

If LVR is not the right word for this 'total asset to debt' ratio, I wonder what is. The word equity doesn't cover it.

 

Total asset to debt ratio sounds good. Including only residential security cash, and mortgage loans and residential property's. Further, use the last bank valuation, the rates notice, or the purchase price to determine current value? A lot of 'value' investors use purchase price. A lot of shenanigans happen for companies when they use inflated values that aren't based on actual transactions.


A lot of investors like to calculate their Total Armageddon Ratio, which is the amount of time they can last if the tenants all leave at once and they lose their job and interest rates are at 8%. Or some variation.

 

I use
total assets owned / total assets (owned + borrowed)
Don't know the word for it. Maybe AVR (Asset to Value Ratio?)

eg

1m property value
300k in equity
100k in offset (I count this as being part of the property asset)
600k owed (loan minus offset)

200k shares value
200k in equity


Total assets owned = 600k (equity + offset + shares)
Total assets = 1.2 (property value + shares value)

AVR = 600k (owned) / 1.2m = 50%


As expected, this changes when you take out the money from the offset though.
Also I don't know how to put this into a formula since the offset thing screws up the formula since I am using "owed" amount to be the actual loan minus the offset.