17 Apr Learn a New Language – “Bank Speak”
Learn a New Language- “Bank Speak”
We’ve all done it. Seated in front of our broker or banker while they use terms that may as well be quotes from a foreign language and we nod our head and pretend we understand.
Let me take this opportunity to give some clarity around some of the most commonly used terms.
LVR (or LSR)
Loan to Valuation Ratio (LVR) or Loan to Security Ratio (LSR). This is the ratio of the loan to the value of the property expressed as a percentage. For example a $600k loan on a property valued at $1m has a 60% LVR.
The number of times that the estimated annual loan interest can be covered by the net profit (or rent) before tax. For example if your interest bill is $60k and your net profit before tax is $100k then your interest cover is 1.67 or 1.67 times.
This is the margin charged by the bank over its actual cost of funds. This margin is a reflection of the risk of the transaction. As an example a fully leased industrial investment might have a risk margin of between 1.5% to 2.5% however a speculative industrial construction project might have a risk margin of between 3% to 5%.
Refers to the amount of debt that a portfolio of properties has against the value of the portfolio. A portfolio that has 50% of debt against its value could be described as conservatively geared whereas a portfolio with 85% of debt would be described as highly geared.
Some lenders look to see if an investor can sustain interest rate increases throughout the life of the loan. They do this by adopting an interest rate higher than the current real rate and analyse whether the borrower’s profit (before tax) can support that notional increased rate. As an example despite current residential lending rates being below 4% most lenders require borrowers to be able to service their proposed debt at 7%
There are many more examples of industry jargon so we will publish some more over the coming months. In the meantime if you are confused by any words or phrases used in your negotiations with your advisers please let us know and we will include them in our next article.
About the author: Paul Robertson is a highly experienced commercial banker with over 30 years industry experience. He has produced and delivered many industry papers to a variety of forums and was the author of a Diploma in Finance text book for a major Registered Training Organisation.