WEBVTT 00:00:00.000 --> 00:00:02.819 OK, let's unpack this. We talk a lot about dreams 00:00:02.819 --> 00:00:06.200 on this show. We talk about the dream of, you 00:00:06.200 --> 00:00:08.380 know, financial independence, the dream of building 00:00:08.380 --> 00:00:11.500 a legacy. Retiring early to a vineyard in Tuscany. 00:00:11.660 --> 00:00:15.519 That's the one. Exactly. But, you know, usually 00:00:15.519 --> 00:00:18.079 when we talk about the specific dream of homeownership, 00:00:18.079 --> 00:00:24.510 the conversation gets very aesthetic. Very quickly. 00:00:24.690 --> 00:00:26.829 We get bogged down in finding the perfect kitchen 00:00:26.829 --> 00:00:28.710 island or making sure it's in the right school 00:00:28.710 --> 00:00:31.589 district or arguing about whether an open concept 00:00:31.589 --> 00:00:33.929 living room is actually a good idea. But today. 00:00:34.049 --> 00:00:36.869 Today is different. Today, we're going to look 00:00:36.869 --> 00:00:39.429 at the gatekeeper. The gatekeeper. That sounds 00:00:39.429 --> 00:00:41.789 incredibly ominous. It is a little ominous. I 00:00:41.789 --> 00:00:43.829 mean, think about it. You can find the house. 00:00:43.869 --> 00:00:45.929 You can haggle the price with the seller until 00:00:45.929 --> 00:00:47.789 you're blue in the face. You've already mentally 00:00:47.789 --> 00:00:50.250 arranged your furniture. Yes. You've picked out 00:00:50.250 --> 00:00:53.090 the pain colors. But there is a single number 00:00:53.090 --> 00:00:56.049 of ratio, really, that stands between you and 00:00:56.049 --> 00:00:58.649 the keys. It determines if you get the loan, 00:00:58.789 --> 00:01:01.109 how much that loan costs you in the long run, 00:01:01.189 --> 00:01:03.409 and frankly, how much sleep the bank manager 00:01:03.409 --> 00:01:05.409 loses over you at night. You're talking about 00:01:05.409 --> 00:01:07.689 the loan -to -value ratio, the LTV. Exactly. 00:01:08.120 --> 00:01:10.599 The LTV, it sounds like just another boring financial 00:01:10.599 --> 00:01:12.680 acronym, right? The kind of thing you just skim 00:01:12.680 --> 00:01:15.200 over in the paperwork while your hand is cramping 00:01:15.200 --> 00:01:18.180 from signing 30 documents. But as we went through 00:01:18.180 --> 00:01:20.420 the research for this deep dive, and we have 00:01:20.420 --> 00:01:23.500 a massive stack of sources here. I mean, banking 00:01:23.500 --> 00:01:26.700 regulations from the US, the UK, Australia, and 00:01:26.700 --> 00:01:30.500 New Zealand, plus some very dense risk assessment 00:01:30.500 --> 00:01:33.519 guidelines. It became pretty clear that this 00:01:33.519 --> 00:01:36.000 isn't just a number. It's the intersection of 00:01:36.000 --> 00:01:39.370 math and dreams. That's a poetic way to put it. 00:01:39.430 --> 00:01:41.129 I'd say it's the intersection of math and risk. 00:01:41.829 --> 00:01:44.670 Well, from the bank's perspective, sure. But 00:01:44.670 --> 00:01:46.969 for the listener, this is the metric that decides 00:01:46.969 --> 00:01:48.829 if they did to participate in the economy or 00:01:48.829 --> 00:01:50.769 not. I mean, it's the ratio that compares the 00:01:50.769 --> 00:01:53.469 size of the loan to the value of the asset securing 00:01:53.469 --> 00:01:56.439 it. Right. And today we are going to decode how 00:01:56.439 --> 00:01:59.400 lenders use this number to judge you while 100 00:01:59.400 --> 00:02:01.500 percent isn't always the limit and how different 00:02:01.500 --> 00:02:03.219 countries. I mean, they actually manipulate this 00:02:03.219 --> 00:02:05.780 number to control their entire economies. It 00:02:05.780 --> 00:02:08.340 really is a fascinating metric because it strips 00:02:08.340 --> 00:02:10.900 away a lot of the emotion of buying a home and 00:02:10.900 --> 00:02:14.300 it just it reduces it to a measure of leverage. 00:02:14.860 --> 00:02:16.939 It's all about how much skin you have in the 00:02:16.939 --> 00:02:19.300 game versus how much exposure the bank has. Right. 00:02:19.819 --> 00:02:22.099 And while that sounds simple, the implications 00:02:22.099 --> 00:02:24.979 are just massive. Massive. And I want to be really 00:02:24.979 --> 00:02:27.939 clear about our mission today. We aren't just 00:02:27.939 --> 00:02:29.900 defining a term here. We are going to look at 00:02:29.900 --> 00:02:32.360 the valuation trap, which I think is going to 00:02:32.360 --> 00:02:35.939 make some listeners, well, angry. It can be frustrating 00:02:35.939 --> 00:02:37.879 for sure. And we're going to look at why banks 00:02:37.879 --> 00:02:41.439 sometimes prefer a borrower with bad credit who 00:02:41.439 --> 00:02:44.280 has a low LTV over a pristine borrower with a 00:02:44.280 --> 00:02:46.939 high LTV. Which is a paradox that trips a lot 00:02:46.939 --> 00:02:48.460 of people up. It seems completely backwards. 00:02:48.680 --> 00:02:50.460 It really does. So let's dive into the anatomy 00:02:50.460 --> 00:02:52.719 of the number. Segment one. Let's just strip 00:02:52.719 --> 00:02:55.219 away all the jargon. What is the basic formula 00:02:55.219 --> 00:02:59.159 we are working with here? Okay. So. At its absolute 00:02:59.159 --> 00:03:02.159 core, the LTV ratio is a division problem. It's 00:03:02.159 --> 00:03:04.740 really that simple. It is the calculation used 00:03:04.740 --> 00:03:07.639 by banks, building societies, credit unions, 00:03:07.919 --> 00:03:10.800 basically anyone lending money to quantify their 00:03:10.800 --> 00:03:13.219 exposure. Their risk. Exactly. You take the first 00:03:13.219 --> 00:03:15.460 mortgage line, that's the primary loan amount 00:03:15.460 --> 00:03:17.840 you were asking to borrow, and you divide it 00:03:17.840 --> 00:03:20.080 by the total appraised value of the property. 00:03:20.479 --> 00:03:24.479 Okay. Simple division. But I want to make this 00:03:24.479 --> 00:03:27.479 really concrete because percentages can get abstract 00:03:27.479 --> 00:03:30.199 and we all kind of glaze over. Yeah. Let's walk 00:03:30.199 --> 00:03:32.520 through the specific scenario from the source 00:03:32.520 --> 00:03:35.060 material. Sure. Let's say you are looking to 00:03:35.060 --> 00:03:38.259 buy a home. It's a modest place listed at $150 00:03:38.259 --> 00:03:42.259 ,000. And let's just assume for a second that 00:03:42.259 --> 00:03:45.520 the value is, in fact, $150 ,000. Okay. So the 00:03:45.520 --> 00:03:48.020 denominator in our equation is $150 ,000. Right. 00:03:48.199 --> 00:03:50.879 Now, like most people, you probably don't have 00:03:50.879 --> 00:03:53.969 $150 ,000 in cash. sitting in a duffel bag under 00:03:53.969 --> 00:03:57.569 your bed. I wish. We all do. So you have some 00:03:57.569 --> 00:03:59.870 savings, but you need to borrow the bulk of the 00:03:59.870 --> 00:04:02.090 purchase price. You go to the bank and you ask 00:04:02.090 --> 00:04:05.610 to borrow $130 ,000. So borrowing $130 ,000, 00:04:05.629 --> 00:04:09.090 the asset is worth $150 ,000. Exactly. So the 00:04:09.090 --> 00:04:12.229 calculator comes out. You take $130 ,000. You 00:04:12.229 --> 00:04:18.310 divide it by $150 ,000. And the result is 0 .86666. 00:04:18.829 --> 00:04:20.490 You know, it goes on. So we just round that up. 00:04:20.569 --> 00:04:26.009 To 0 .87. 0 .87, which gives us an LTV of 87%. 00:04:26.009 --> 00:04:30.509 So I'm financing 87 % of the home's value. That's 00:04:30.509 --> 00:04:32.740 it. That's my score. That is your risk score, 00:04:32.860 --> 00:04:35.240 essentially, yes. Now, simple math tells me there 00:04:35.240 --> 00:04:37.519 is a remainder there. There's 13 % left over. 00:04:37.939 --> 00:04:40.819 In this scenario, that's the $20 ,000 I presumably 00:04:40.819 --> 00:04:44.420 put down as a down payment. But the source material 00:04:44.420 --> 00:04:46.579 used a term for this that I found really interesting. 00:04:46.680 --> 00:04:49.019 They called it the lender's haircut. Yes, the 00:04:49.019 --> 00:04:51.980 haircut. It's very common finance speak. It sounds 00:04:51.980 --> 00:04:54.839 like a bad salon experience. I went to the bank 00:04:54.839 --> 00:04:56.920 and got a terrible haircut. But why use that 00:04:56.920 --> 00:04:58.959 term? What does that even mean? Well, in broader 00:04:58.959 --> 00:05:01.879 finance, a haircut refers to the difference between 00:05:01.879 --> 00:05:04.800 the market value of an asset and the value ascribed 00:05:04.800 --> 00:05:06.839 to it for collateral purposes. It's a reduction. 00:05:07.199 --> 00:05:09.560 But in the mortgage world, just think of it as 00:05:09.560 --> 00:05:12.660 the buffer. The buffer. That 13%, your equity, 00:05:12.879 --> 00:05:15.220 that is the lender's safety net. It represents 00:05:15.220 --> 00:05:18.399 the haircut off the total value that the lender 00:05:18.399 --> 00:05:20.420 doesn't have to worry about losing if things 00:05:20.420 --> 00:05:23.019 go south. So the haircut is basically the bank 00:05:23.019 --> 00:05:26.620 saying, you take the first hit. 100 percent. 00:05:26.680 --> 00:05:28.879 That is exactly what it is. If the house burns 00:05:28.879 --> 00:05:32.800 down or more realistically, if the housing market 00:05:32.800 --> 00:05:35.920 crashes and values drop by 10 percent, that loss 00:05:35.920 --> 00:05:39.240 comes out of your $20 ,000. Not theirs. The bank's 00:05:39.240 --> 00:05:42.120 $130 ,000 is still theoretically safe because 00:05:42.120 --> 00:05:43.860 it's covered by the remaining value of the home. 00:05:44.040 --> 00:05:46.740 So the bank is using my money as a shield for 00:05:46.740 --> 00:05:49.060 their money. That is the fundamental nature of 00:05:49.060 --> 00:05:51.920 a secured loan. Your equity is the shock absorber. 00:05:52.019 --> 00:05:54.379 And this establishes the fundamental rule of 00:05:54.379 --> 00:05:57.050 LTV. There is an inverse relationship between 00:05:57.050 --> 00:05:59.709 the LTV ratio and the lender's risk. Walk me 00:05:59.709 --> 00:06:01.269 through that relationship. I think I get it, 00:06:01.290 --> 00:06:03.930 but spell it out. It's simple, really. The higher 00:06:03.930 --> 00:06:06.250 the LTV, meaning the closer that ratio gets to 00:06:06.250 --> 00:06:08.910 100%, the lower the equity you have in the deal. 00:06:09.110 --> 00:06:11.129 The lower your equity, the smaller the haircut 00:06:11.129 --> 00:06:13.689 or buffer. And a small buffer means? A small 00:06:13.689 --> 00:06:15.990 buffer means the loan is much, much riskier for 00:06:15.990 --> 00:06:18.649 the bank. Because if I have an 87 % LTV, I have 00:06:18.649 --> 00:06:21.949 13 % skin in the game. Right. If things get tough. 00:06:22.750 --> 00:06:24.250 I'm going to fight to keep that house because 00:06:24.250 --> 00:06:25.870 I don't want to lose my 20 grand. Right. But 00:06:25.870 --> 00:06:29.870 if I had, say, a 99 % LTV. If you have a 99 % 00:06:29.870 --> 00:06:33.050 LTV, you have almost nothing to lose. If the 00:06:33.050 --> 00:06:36.149 market drops just 2%, you are suddenly underwater, 00:06:36.430 --> 00:06:38.689 meaning you owe more than the house is worth. 00:06:38.850 --> 00:06:41.370 Oh, wow. At that point, historically speaking, 00:06:41.629 --> 00:06:45.110 borrowers are much more likely to just mail the 00:06:45.110 --> 00:06:47.730 keys back to the bank and walk away. That's the 00:06:47.730 --> 00:06:50.250 strategic default concept we heard so much about 00:06:50.250 --> 00:06:53.649 in 2008. Exactly. So the bank wants that haircut 00:06:53.649 --> 00:06:55.970 to be as deep as possible to prevent you from 00:06:55.970 --> 00:06:58.410 walking away and to ensure that if they have 00:06:58.410 --> 00:07:00.689 to foreclose and sell the house, the sale price 00:07:00.689 --> 00:07:03.129 covers the debt. Okay. So that's the numerator 00:07:03.129 --> 00:07:06.430 and the denominator. Loan amount divided by value. 00:07:07.790 --> 00:07:10.470 But here's where I want to push back a bit because 00:07:10.470 --> 00:07:15.050 the value part of that equation feels slippery. 00:07:15.310 --> 00:07:19.470 Well, value. According to whom? If I agree to 00:07:19.470 --> 00:07:22.990 pay a seller $150 ,000 and they agree to sell 00:07:22.990 --> 00:07:25.569 it for $150 ,000, isn't that the value? I mean, 00:07:25.569 --> 00:07:27.730 that's the market price. That's capitalism. In 00:07:27.730 --> 00:07:31.029 a philosophical sense, yes. The value of a thing 00:07:31.029 --> 00:07:32.930 is what someone is willing to pay for it. Right. 00:07:32.990 --> 00:07:35.529 But banks are not philosophers. They are risk 00:07:35.529 --> 00:07:38.430 managers. And they operate under a very specific 00:07:38.430 --> 00:07:41.649 rule called the lesser of. Ah, the valuation 00:07:41.649 --> 00:07:44.329 trap. Right. The rule states that banks will 00:07:44.329 --> 00:07:47.310 utilize the lesser of the appraised value or 00:07:47.310 --> 00:07:50.089 the purchase price. And this assumes an arm's 00:07:50.089 --> 00:07:52.310 length transaction, meaning you aren't buying 00:07:52.310 --> 00:07:54.529 it from your brother for a dollar or something. 00:07:54.810 --> 00:07:56.990 So let's play this out. I get into a bidding 00:07:56.990 --> 00:08:00.149 war. The house is listed for $140 ,000. I really 00:08:00.149 --> 00:08:03.189 want it. I bid $150 ,000. The seller accepts. 00:08:03.410 --> 00:08:05.769 We sign the contract. I'm happy. The seller is 00:08:05.769 --> 00:08:08.439 happy. Everyone's happy. But the bank is skeptical. 00:08:08.860 --> 00:08:11.300 They send an appraiser out, a third party with 00:08:11.300 --> 00:08:14.139 a clipboard and a database of comps or comparable 00:08:14.139 --> 00:08:16.759 sales. This appraiser looks at the house and 00:08:16.759 --> 00:08:18.879 says, you know what? I see the contract says 00:08:18.879 --> 00:08:21.680 150, but the house down the street only sold 00:08:21.680 --> 00:08:26.040 for 140. This roof is old. I appraise this house 00:08:26.040 --> 00:08:29.579 at $140 ,000. This is the nightmare scenario 00:08:29.579 --> 00:08:33.870 for a buyer because now the value. in your LTV 00:08:33.870 --> 00:08:37.509 calculation isn't $150 ,000 anymore. It's $140 00:08:37.509 --> 00:08:40.029 ,000. Correct. The bank ignores the price you 00:08:40.029 --> 00:08:42.049 agreed to pay. They look at the appraisal. End 00:08:42.049 --> 00:08:44.509 of story. But I still need to borrow the money 00:08:44.509 --> 00:08:47.049 to pay the seller the $150 ,000 we agreed on. 00:08:47.309 --> 00:08:49.029 I mean, the seller doesn't care what the appraiser 00:08:49.029 --> 00:08:51.629 thinks. That's your problem, not the bank's. 00:08:51.690 --> 00:08:53.970 The bank says we are only comfortable lending 00:08:53.970 --> 00:08:56.649 against the value of the collateral. If they 00:08:56.649 --> 00:08:59.970 lend you money based on the $150 ,000, but the 00:08:59.970 --> 00:09:03.039 asset securing it is only worth $140 ,000, Well, 00:09:03.139 --> 00:09:06.120 their risk profile just skyrocketed. So what 00:09:06.120 --> 00:09:07.759 happens to the math? What does that do to my 00:09:07.759 --> 00:09:10.559 LTV? Well, let's look at it. You wanted to borrow 00:09:10.559 --> 00:09:15.080 $130 ,000. If the value is $150 ,000, that's 00:09:15.080 --> 00:09:19.039 87 % LTV. We established that. But if the value 00:09:19.039 --> 00:09:23.980 is suddenly $140 ,000, $130 ,000 divided by $140 00:09:23.980 --> 00:09:28.879 ,000 is... Roughly 93%. That's a huge jump. It 00:09:28.879 --> 00:09:31.340 is. And that jump might push you into a bracket 00:09:31.340 --> 00:09:33.759 where the loan is just denied or the interest 00:09:33.759 --> 00:09:36.320 rate is higher or the mortgage insurance premiums 00:09:36.320 --> 00:09:38.960 double. It changes everything. So I'm just stuck. 00:09:39.240 --> 00:09:42.690 Unless you have cash. Usually this forces the 00:09:42.690 --> 00:09:45.370 borrower to pay the appraisal gap out of pocket. 00:09:45.929 --> 00:09:48.009 You have to come up with that extra $10 ,000 00:09:48.009 --> 00:09:50.330 in cash to bring the loan amount back down to 00:09:50.330 --> 00:09:53.029 a comfortable LTV for the bank. It feels like 00:09:53.029 --> 00:09:55.210 the bank is saying heads we win, tails you lose. 00:09:55.789 --> 00:09:58.330 Because let me ask you this. What if I get a 00:09:58.330 --> 00:10:00.629 great deal? Say I'm a great negotiator and I 00:10:00.629 --> 00:10:05.029 buy that $150 ,000 house for $130 ,000. Does 00:10:05.029 --> 00:10:07.690 the bank use the $150 ,000 appraisal then? No, 00:10:07.750 --> 00:10:09.970 absolutely not. I knew it. If you buy it for 00:10:09.970 --> 00:10:12.750 $130 ,000, they use the purchase price. See? 00:10:13.769 --> 00:10:16.710 That feels rigged. It's conservative. It's just 00:10:16.710 --> 00:10:20.309 pure risk management. They always choose the 00:10:20.309 --> 00:10:21.950 number that results in the highest calculated 00:10:21.950 --> 00:10:24.850 risk or the lowest value just to be safe. They 00:10:24.850 --> 00:10:27.809 use the lesser of to protect their haircut. They 00:10:27.809 --> 00:10:29.970 assume that if you bought it for $130, well, 00:10:30.009 --> 00:10:31.529 maybe there's something wrong with it, that the 00:10:31.529 --> 00:10:33.549 appraiser missed, or maybe that's just the true 00:10:33.549 --> 00:10:36.049 market value now. Okay, so we've got the formula. 00:10:36.090 --> 00:10:38.490 We understand the trap. Now let's talk about 00:10:38.490 --> 00:10:41.850 the magic number. The source material keeps circling 00:10:41.850 --> 00:10:45.669 back to this pivot point, 80%. The 80 % rule. 00:10:46.200 --> 00:10:48.259 This is really the industry standard line in 00:10:48.259 --> 00:10:51.419 the sand. Why 80 percent? I mean, is there something 00:10:51.419 --> 00:10:54.539 magical about having 20 percent equity or is 00:10:54.539 --> 00:10:56.519 it just a nice round number that bankers like? 00:10:56.720 --> 00:10:59.620 It's largely historical and statistical. Lenders 00:10:59.620 --> 00:11:02.559 have mountains of data going back decades through 00:11:02.559 --> 00:11:05.980 booms and busts. That data consistently shows 00:11:05.980 --> 00:11:08.740 that the likelihood of a lender absorbing a financial 00:11:08.740 --> 00:11:11.779 loss is directly tied to that equity buffer. 00:11:12.220 --> 00:11:15.679 And at 80 % LTV, meaning the borrower puts 20 00:11:15.679 --> 00:11:18.879 % down, the risk of default resulting in an actual 00:11:18.879 --> 00:11:21.299 loss for the bank just drops significantly. It's 00:11:21.299 --> 00:11:24.519 a statistical cliff. So below 80 % is the safe 00:11:24.519 --> 00:11:28.200 zone. Correct. Low LTV. In this zone, the bank 00:11:28.200 --> 00:11:30.559 breathes easy. You generally get the best interest 00:11:30.559 --> 00:11:32.779 rates here, the best terms. It's where you want 00:11:32.779 --> 00:11:36.009 to be. But being in the safe zone creates a really 00:11:36.009 --> 00:11:38.230 weird dynamic. This was one of the most surprising 00:11:38.230 --> 00:11:40.330 things in the notes for me. The paradox. Yes. 00:11:40.470 --> 00:11:43.549 The source says, and I'm quoting here, low LTV 00:11:43.549 --> 00:11:46.769 ratios allow lenders to consider higher risk 00:11:46.769 --> 00:11:49.429 borrowers. Hang on. That sounds completely backwards. 00:11:49.549 --> 00:11:52.389 If I have bad credit, maybe a few late payments, 00:11:52.549 --> 00:11:54.870 or my debt to income ratio is a little high, 00:11:54.990 --> 00:11:57.350 or I'm self -employed with messy tax returns, 00:11:57.629 --> 00:12:00.149 I'm a high risk borrower. You would think the 00:12:00.149 --> 00:12:02.049 bank would want more proof from me, not less. 00:12:02.289 --> 00:12:04.440 You'd think so. But the source says if the LTV 00:12:04.440 --> 00:12:06.360 is low enough, they might just ignore all that. 00:12:06.460 --> 00:12:08.980 Think about it from the bank's perspective. Let's 00:12:08.980 --> 00:12:11.799 say you are a wealthy individual with a very 00:12:11.799 --> 00:12:14.419 complicated income stream. Maybe it fluctuates 00:12:14.419 --> 00:12:17.320 wildly. Your credit score is mediocre because 00:12:17.320 --> 00:12:19.379 you missed a few credit card payments while traveling 00:12:19.379 --> 00:12:23.179 internationally. But you want to buy a $1 million 00:12:23.179 --> 00:12:27.360 house and you are putting $400 ,000 down in cash. 00:12:28.029 --> 00:12:30.750 So I'm borrowing $600 ,000 on a million dollar 00:12:30.750 --> 00:12:34.610 asset. Right. That's a 60 % LTV. I'm deep in 00:12:34.610 --> 00:12:37.250 the safe zone. Exactly. Now, does the bank really 00:12:37.250 --> 00:12:40.789 care if your income is sporadic or that you missed 00:12:40.789 --> 00:12:43.679 a visa payment? I guess not. They don't. Because 00:12:43.679 --> 00:12:46.379 even if you default, even if you never make a 00:12:46.379 --> 00:12:49.080 single mortgage payment, the bank can foreclose, 00:12:49.080 --> 00:12:51.980 sell the house for a fire sale price of, say, 00:12:52.100 --> 00:12:54.860 $800 ,000 just to get rid of it quickly. And 00:12:54.860 --> 00:12:56.559 they still get their money back? They pay off 00:12:56.559 --> 00:12:59.120 the $600 ,000 loan, cover all their legal fees, 00:12:59.320 --> 00:13:02.259 and still have $100 ,000 left over. The asset 00:13:02.259 --> 00:13:05.389 covers the risk. The asset covers the risk. Precisely. 00:13:05.429 --> 00:13:08.730 This is why no -doc or low -doc loans exist. 00:13:09.129 --> 00:13:11.850 These are loans where you provide very little 00:13:11.850 --> 00:13:14.549 documentation about your income. They are only 00:13:14.549 --> 00:13:17.610 possible because the LTV is so low. So it's cash 00:13:17.610 --> 00:13:19.950 covers character. That's a perfect way to put 00:13:19.950 --> 00:13:22.809 it. If you lower the LTV enough, you can bypass 00:13:22.809 --> 00:13:26.450 a lot of the character flaws in your credit report. 00:13:26.730 --> 00:13:28.789 The bank is lending to the house, not to you. 00:13:29.009 --> 00:13:32.669 But then we cross the line. We go above 80%. 00:13:33.360 --> 00:13:36.480 into the danger zone. High LTV. Anything above 00:13:36.480 --> 00:13:39.259 80%. Now the dynamic flicks completely on its 00:13:39.259 --> 00:13:42.019 head. Right. Because the source says that contrary 00:13:42.019 --> 00:13:45.679 to the low LTE scenario, high LTV loans are primarily 00:13:45.679 --> 00:13:47.940 reserved for borrowers with higher credit scores. 00:13:48.200 --> 00:13:49.960 It makes sense, doesn't it? If you are borrowing 00:13:49.960 --> 00:13:53.139 90 or 95 % of the home's value, the bank has 00:13:53.139 --> 00:13:55.720 almost no buffer. Their haircut is just a little 00:13:55.720 --> 00:13:58.299 trim. If I stumble, they fall. Exactly. So they 00:13:58.299 --> 00:14:00.220 need to be absolutely certain that you aren't 00:14:00.220 --> 00:14:01.820 going to stumble. So they stop looking at the 00:14:01.820 --> 00:14:04.440 asset and they start looking at the person. 100%. 00:14:04.440 --> 00:14:07.340 They need to see a pristine payment history, 00:14:07.480 --> 00:14:09.720 a solid job with tenure, high credit scores, 00:14:09.860 --> 00:14:12.519 low debt. They can't rely on the equity to save 00:14:12.519 --> 00:14:15.259 them, so they have to rely on you. You have to 00:14:15.259 --> 00:14:18.899 be the safety net. And even then, even with the 00:14:18.899 --> 00:14:21.860 good credit score, they don't trust you completely. 00:14:22.730 --> 00:14:25.429 Because this is where MI comes in. Mortgage insurance. 00:14:25.669 --> 00:14:28.570 The bane of every first -time homebuyer's existence. 00:14:29.029 --> 00:14:32.350 It is the cost of doing business above 80%. The 00:14:32.350 --> 00:14:35.850 source is very clear. Lenders require borrowers 00:14:35.850 --> 00:14:39.629 of high LTV loans to buy mortgage insurance to 00:14:39.629 --> 00:14:41.610 protect the lender from the buyer's default. 00:14:41.990 --> 00:14:43.750 I want to highlight that phrasing because it's 00:14:43.750 --> 00:14:46.590 so important. I pay the premium, which can be... 00:14:46.960 --> 00:14:49.000 Hundreds of dollars a month. But the insurance 00:14:49.000 --> 00:14:51.320 protects them. If I lose my job, that insurance 00:14:51.320 --> 00:14:53.639 doesn't pay my mortgage rate. No, it does absolutely 00:14:53.639 --> 00:14:55.480 nothing for you. It's not for your benefit at 00:14:55.480 --> 00:14:57.919 all. It protects the bank's haircut. It basically 00:14:57.919 --> 00:15:00.279 insures that top 15 to 20 percent of the loan. 00:15:00.480 --> 00:15:02.740 If you default, the insurance company cuts a 00:15:02.740 --> 00:15:04.620 check to the bank to cover the loss. So that's 00:15:04.620 --> 00:15:06.440 why they're willing to do it. That's the only 00:15:06.440 --> 00:15:09.460 reason banks are willing to lend 95 or 97 percent 00:15:09.460 --> 00:15:12.659 on a home. Without MI, the risk would be mathematically 00:15:12.659 --> 00:15:15.220 unacceptable to them. So it's the price of admission. 00:15:15.789 --> 00:15:17.850 If I don't have the 20 % down, I have to pay 00:15:17.850 --> 00:15:19.809 the insurance company to take the risk on my 00:15:19.809 --> 00:15:22.269 behalf. Correct. You're paying to make yourself 00:15:22.269 --> 00:15:25.169 look like a lower -risk borrower on paper. So 00:15:25.169 --> 00:15:27.509 we have the safe zone, which is less than 80%. 00:15:27.509 --> 00:15:31.169 The danger zone, over 80 % with MI. Right. But 00:15:31.169 --> 00:15:34.049 the source mentions the extremes. Right. 100 00:15:34.049 --> 00:15:38.490 % LTV. Full financing. The holy grail for first 00:15:38.490 --> 00:15:41.269 -time buyers. Who actually gets this? Is this 00:15:41.269 --> 00:15:43.889 a real thing? In the private market, almost no 00:15:43.889 --> 00:15:47.370 one. The source notes that 100 percent LTV is 00:15:47.370 --> 00:15:50.470 reserved for only the most credit worthy borrowers. 00:15:50.570 --> 00:15:53.190 You have to think ultra high net worth individuals 00:15:53.190 --> 00:15:55.929 where the bank holds their other assets, their 00:15:55.929 --> 00:15:58.590 investment portfolio. For normal people, 100 00:15:58.590 --> 00:16:01.610 percent financing is a unicorn unless, as we'll 00:16:01.610 --> 00:16:03.470 see later, you have some government help. And 00:16:03.470 --> 00:16:06.470 then the nightmare scenario. Greater than 100 00:16:06.470 --> 00:16:09.029 percent. Underwater mortgages. This sounds like 00:16:09.029 --> 00:16:12.110 a physics problem. How can the loan be bigger 00:16:12.110 --> 00:16:15.159 than the house? Well, it rarely starts that way. 00:16:15.220 --> 00:16:17.320 It usually happens after the fact. You buy a 00:16:17.320 --> 00:16:21.620 house at 95 % LTV, the market drops 10%. Suddenly, 00:16:21.720 --> 00:16:25.879 you owe $190 ,000 on a house that's only worth 00:16:25.879 --> 00:16:31.519 $180 ,000. Your LTV is now roughly 105%. You're 00:16:31.519 --> 00:16:33.940 underwater. You're underwater. And why is this 00:16:33.940 --> 00:16:36.419 so dangerous? I mean, if I can still afford the 00:16:36.419 --> 00:16:38.340 monthly payment, does it really matter if I'm 00:16:38.340 --> 00:16:40.539 underwater? It matters immensely if you need 00:16:40.539 --> 00:16:42.679 to move. If you get a job offer in another state 00:16:42.679 --> 00:16:44.960 or you get divorced or you have triplets and 00:16:44.960 --> 00:16:49.299 need a bigger house, you can't sell. Because 00:16:49.299 --> 00:16:51.840 if I sell for $180, I still owe the bank $10 00:16:51.840 --> 00:16:55.230 ,000. Plus. Closing costs. So you'd have to write 00:16:55.230 --> 00:16:57.710 a check for maybe $20 ,000 just to get out of 00:16:57.710 --> 00:16:59.769 the house. Most people don't have that. So they 00:16:59.769 --> 00:17:01.669 are trapped. They are prisoners of their LTV. 00:17:01.850 --> 00:17:04.809 That is a terrifying place to be. But, you know, 00:17:04.849 --> 00:17:07.230 life isn't always as simple as one house, one 00:17:07.230 --> 00:17:10.910 loan. Sometimes we stack debt. And this brings 00:17:10.910 --> 00:17:13.109 us to the next layer of complexity in our outline. 00:17:13.930 --> 00:17:17.009 CLTV. The Combined Loan -to -Value. I like to 00:17:17.009 --> 00:17:19.829 think of this as the layer cake of debt, because 00:17:19.829 --> 00:17:22.049 in the real world, people don't just have a mortgage. 00:17:22.109 --> 00:17:24.529 They have a second mortgage. They have a HELOC. 00:17:24.609 --> 00:17:27.569 Right. The CLTV is the proportion of all loans 00:17:27.569 --> 00:17:30.150 secured by a property in relation to its value. 00:17:30.410 --> 00:17:33.049 The key word here is combined, or sometimes you'll 00:17:33.049 --> 00:17:35.930 see cumulative. It's the same idea. So let's 00:17:35.930 --> 00:17:38.710 walk through the math of multiple liens. A lien 00:17:38.710 --> 00:17:40.930 basically being a legal claim on the property. 00:17:41.069 --> 00:17:43.210 Correct. A mortgage is a lien. A second mortgage 00:17:43.210 --> 00:17:46.029 is a lien. A tax judgment can be a lien. It's 00:17:46.029 --> 00:17:50.569 a claim. So scenario A, I have a $100 ,000 house. 00:17:50.769 --> 00:17:54.109 I have a single mortgage for $50 ,000. My LTV 00:17:54.109 --> 00:17:57.769 is 50%. Easy. Safe. Very safe. The bank loves 00:17:57.769 --> 00:18:01.029 you. Your model client. Now, scenario B, same 00:18:01.029 --> 00:18:04.309 house. $100 ,000 value. I have that first mortgage 00:18:04.309 --> 00:18:08.039 of $50 ,000. But I decide. I want a new kitchen. 00:18:08.099 --> 00:18:10.039 I want those granite countertops we talked about. 00:18:10.140 --> 00:18:12.279 So I take out a second mortgage for $25 ,000. 00:18:12.799 --> 00:18:16.539 Okay. So now... A bank looking at your risk profile, 00:18:16.680 --> 00:18:18.119 maybe you're trying to refinance or get another 00:18:18.119 --> 00:18:20.299 loan, doesn't just look at the $50 ,000. They 00:18:20.299 --> 00:18:22.279 have to look at the aggregate balance. The total. 00:18:22.400 --> 00:18:26.220 $50 ,000 plus $25 ,000 equals $75 ,000 total 00:18:26.220 --> 00:18:29.339 debt secured by that house. So my LTV might be 00:18:29.339 --> 00:18:32.940 50 % on that first loan, but my CLTD is 75%. 00:18:32.940 --> 00:18:35.920 Exactly. And that CLTV is the real measure of 00:18:35.920 --> 00:18:38.700 your leverage. If you default, the sale of the 00:18:38.700 --> 00:18:41.420 house has to pay off both of those debts. The 00:18:41.420 --> 00:18:43.920 second mortgage holder only gets paid after the 00:18:43.920 --> 00:18:46.400 first. is made whole. But there's a sneaky one 00:18:46.400 --> 00:18:50.900 in here. The HELOC. The Home Equity Line of Credit. 00:18:51.039 --> 00:18:52.900 This is like a credit card secured by your house, 00:18:53.019 --> 00:18:55.400 right? It is. And it complicates the math because 00:18:55.400 --> 00:18:58.420 a HELOC has a balance what you owe right now 00:18:58.420 --> 00:19:00.160 and a limit, which is what you could borrow. 00:19:00.420 --> 00:19:03.680 The source gives a specific example. A $100 ,000 00:19:03.680 --> 00:19:07.940 property, a $50 ,000 first mortgage, and a HELOC 00:19:07.940 --> 00:19:11.000 with a balance of $10 ,000. So you add it up. 00:19:11.279 --> 00:19:14.599 50 ,000 plus 10 ,000 divided by 100 ,000. That's 00:19:14.599 --> 00:19:18.240 a 60 % CLTV. But wait a second. What if my limit 00:19:18.240 --> 00:19:21.779 on that HLLC is $40 ,000? I only owe 10 ,000 00:19:21.779 --> 00:19:23.740 today, but I could go buy a boat tomorrow and 00:19:23.740 --> 00:19:26.259 max it out. Does the bank care about that potential 00:19:26.259 --> 00:19:28.720 debt? Yes, they do. A very conservative lender 00:19:28.720 --> 00:19:32.680 will. That's often called the HCLTV or TLTV total 00:19:32.680 --> 00:19:36.579 loan to value. Some rigorous risk models assume 00:19:36.579 --> 00:19:39.359 you will max out your credit lines. Because if 00:19:39.359 --> 00:19:41.180 things get tight financially, what do people 00:19:41.180 --> 00:19:43.500 do? They use all their available credit. They 00:19:43.500 --> 00:19:45.700 draw down every cent of credit they have. So 00:19:45.700 --> 00:19:48.819 that potential debt is a real risk. So hidden 00:19:48.819 --> 00:19:51.799 debt is a killer in risk assessment. It is. The 00:19:51.799 --> 00:19:54.059 takeaway is that to measure the true riskiness 00:19:54.059 --> 00:19:56.799 of the borrower, you must look at all outstanding 00:19:56.799 --> 00:19:59.380 debt, not just the primary mortgage. It's like 00:19:59.380 --> 00:20:02.140 looking at an iceberg. The LTV is the tip, but 00:20:02.140 --> 00:20:04.480 the CLTV is everything lurking underneath the 00:20:04.480 --> 00:20:06.960 water. So we've dissected the number. We've looked 00:20:06.960 --> 00:20:09.140 at the trap. We've stacked the loans. Now, I 00:20:09.140 --> 00:20:11.289 want to zoom out. Because what I found fascinating 00:20:11.289 --> 00:20:13.529 in reading through these regulations is that 00:20:13.529 --> 00:20:16.309 LTV isn't a universal language. I mean, the math 00:20:16.309 --> 00:20:19.150 is the same, but the rules change wildly depending 00:20:19.150 --> 00:20:21.470 on which country you're standing in. It really 00:20:21.470 --> 00:20:24.150 does. Different nations use LTV for different 00:20:24.150 --> 00:20:26.630 purposes. In some places, it's just a private 00:20:26.630 --> 00:20:29.410 bank rule. In others, it's a government weapon. 00:20:29.509 --> 00:20:32.009 Let's start at home, or at least the biggest 00:20:32.009 --> 00:20:34.809 market in our source material, the United States. 00:20:35.369 --> 00:20:38.410 The U .S. is interesting because it's a mix of 00:20:38.410 --> 00:20:41.829 private and public rules. You have the conforming 00:20:41.829 --> 00:20:44.089 loans. These are the ones that meet the guidelines 00:20:44.089 --> 00:20:47.049 set by Fannie Mae and Freddie Mac. The two government 00:20:47.049 --> 00:20:50.079 sponsored enterprises. the giants of the mortgage 00:20:50.079 --> 00:20:52.680 world. Right. And their guideline is pretty strict 00:20:52.680 --> 00:20:55.779 on that 80 % pivot point we talked about. They 00:20:55.779 --> 00:20:59.480 will generally limit the LTV to less than or 00:20:59.480 --> 00:21:02.759 equal to 80 % without insurance. If you go above 00:21:02.759 --> 00:21:05.779 80 % on a conforming loan, you must have private 00:21:05.779 --> 00:21:07.759 mortgage insurance. It's not really a choice. 00:21:07.940 --> 00:21:10.000 It's a requirement to sell that loan on the secondary 00:21:10.000 --> 00:21:12.470 market. Precisely. But the U .S. has this whole 00:21:12.470 --> 00:21:14.670 alphabet soup of government exceptions, right? 00:21:14.750 --> 00:21:16.670 And this is where the U .S. government basically 00:21:16.670 --> 00:21:19.609 steps in to break the rules of risk we just spent 00:21:19.609 --> 00:21:22.329 all this time discussing. Yes. It's a policy 00:21:22.329 --> 00:21:25.509 choice. The U .S. government has decided that 00:21:25.509 --> 00:21:29.089 homeownership is a social good. So they created 00:21:29.089 --> 00:21:32.369 agencies to absorb risk that private banks won't 00:21:32.369 --> 00:21:34.730 touch. Let's talk about the FHA, the Federal 00:21:34.730 --> 00:21:37.049 Housing Administration. They insure purchase 00:21:37.049 --> 00:21:41.279 loans up to 96 .5 percent. So you only need a 00:21:41.279 --> 00:21:44.759 3 .5 % down payment. Exactly. And that is a massive, 00:21:44.839 --> 00:21:47.759 massive difference from 20%. If you're buying 00:21:47.759 --> 00:21:52.309 a $200 ,000 house. 20 % down is $40 ,000. That 00:21:52.309 --> 00:21:54.930 takes years for most people to save. Right. 3 00:21:54.930 --> 00:21:58.490 .5 % down is $7 ,000. That's a tax refund and 00:21:58.490 --> 00:22:00.609 a few months of discipline. It opens the door 00:22:00.609 --> 00:22:02.569 to millions of people who would otherwise be 00:22:02.569 --> 00:22:05.309 locked out. But the FHA isn't even the most aggressive. 00:22:05.529 --> 00:22:08.069 No. The VA, the Department of Veterans Affairs, 00:22:08.329 --> 00:22:10.930 the USDA, the Department of Agriculture for rural 00:22:10.930 --> 00:22:13.210 areas, they take the crown. They guarantee purchase 00:22:13.210 --> 00:22:17.049 loans up to 100 % LTV. Zero down. No haircut 00:22:17.049 --> 00:22:19.799 at all. Zero down. How is this possible? I mean, 00:22:19.819 --> 00:22:22.400 we just spent 20 minutes explaining that 100 00:22:22.400 --> 00:22:25.799 % LTV is incredibly risky. How can the VA do 00:22:25.799 --> 00:22:27.960 this without bankrupting the system? Because 00:22:27.960 --> 00:22:30.579 of the guarantee. The government is stepping 00:22:30.579 --> 00:22:33.400 in as the ultimate guarantor. They're telling 00:22:33.400 --> 00:22:36.519 the bank, lend this veteran 100%. If they default, 00:22:36.680 --> 00:22:38.900 we've got your back. We will cover the loss. 00:22:39.200 --> 00:22:41.460 That's a key distinction. It's not that the risk 00:22:41.460 --> 00:22:44.019 disappears. It's just shifted. Right. It's shifted 00:22:44.019 --> 00:22:47.039 from the bank to the taxpayer. The bank is willing 00:22:47.039 --> 00:22:50.000 to lend 100 % because their risk is effectively 00:22:50.000 --> 00:22:52.579 zero, thanks to Uncle Sam. Okay. So that's the 00:22:52.579 --> 00:22:55.000 U .S. model. Now, let's hop over the Pacific 00:22:55.000 --> 00:22:58.079 to Australia. because their system has some really 00:22:58.079 --> 00:23:01.079 unique quirks. Australia is fascinating. They 00:23:01.079 --> 00:23:04.579 use the term LVR loan to valuation ratio, but 00:23:04.579 --> 00:23:06.859 it's the same math. Their safe zone is the same. 00:23:07.220 --> 00:23:10.099 80 % or lower is considered low risk. But they 00:23:10.099 --> 00:23:13.259 have this other tier for no -doc or low -doc 00:23:13.259 --> 00:23:15.799 loans. Right. If you want a loan with less paperwork, 00:23:16.099 --> 00:23:18.400 maybe you're self -employed with a complex income, 00:23:18.640 --> 00:23:22.559 you need an LVR of 60 % or below. Again, cash 00:23:22.559 --> 00:23:25.099 covers character. More equity buys you less scrutiny. 00:23:25.559 --> 00:23:27.700 But what about the high end? The source mentioned 00:23:27.700 --> 00:23:30.440 something about a guarantor solution. This sounds 00:23:30.440 --> 00:23:32.180 different from the U .S. government guarantee. 00:23:32.559 --> 00:23:34.940 It is very different. In the U .S., the guarantor 00:23:34.940 --> 00:23:37.380 is the government. In Australia, the guarantor 00:23:37.380 --> 00:23:40.000 is usually mom and dad. Ah, the bank of mom and 00:23:40.000 --> 00:23:42.619 dad. Literally. They have financial products 00:23:42.619 --> 00:23:47.019 that allow for 100 % LVR, no deposit at all, 00:23:47.099 --> 00:23:49.880 but only if a family member offers their own 00:23:49.880 --> 00:23:52.660 property as additional security. This is called 00:23:52.660 --> 00:23:56.519 a guarantor home loan. So wait, I buy a house 00:23:56.519 --> 00:23:59.779 with zero money down, but my parents put a lien 00:23:59.779 --> 00:24:02.019 on their house to back me up. Correct. The bank 00:24:02.019 --> 00:24:04.400 is lending 100 % of the value of your new home, 00:24:04.480 --> 00:24:06.480 but they are securing it against two properties. 00:24:06.799 --> 00:24:09.880 The LTV across the combined portfolio is safe 00:24:09.880 --> 00:24:12.519 for them, even if your specific loan is risky 00:24:12.519 --> 00:24:16.539 on its own. That is clever and emotionally terrifying. 00:24:16.900 --> 00:24:18.960 It is. If you default, you don't just lose your 00:24:18.960 --> 00:24:21.000 house. You could cost your parents their home 00:24:21.000 --> 00:24:23.450 or at least a big chunk of their equity. It raises 00:24:23.450 --> 00:24:25.730 the stakes significantly. The source calls this 00:24:25.730 --> 00:24:29.289 a nuanced approach. It balances access to homeownership 00:24:29.289 --> 00:24:31.869 for those with no deposit against financial stability. 00:24:32.170 --> 00:24:35.369 It solves the deposit problem, but it leverages 00:24:35.369 --> 00:24:38.490 the family unit in a very direct way. It definitely 00:24:38.490 --> 00:24:40.730 highlights a different cultural approach to risk 00:24:40.730 --> 00:24:43.680 and family obligation. Now, let's go next door 00:24:43.680 --> 00:24:46.099 to New Zealand, because if Australia is using 00:24:46.099 --> 00:24:48.900 LTV to help families, New Zealand seems to be 00:24:48.900 --> 00:24:51.259 using it to fight a war. A war against a housing 00:24:51.259 --> 00:24:53.819 bubble. Yes. New Zealand is a great case study 00:24:53.819 --> 00:24:56.319 in macro prudential policy. Which is a fancy 00:24:56.319 --> 00:24:58.559 way of saying controlling the whole economy from 00:24:58.559 --> 00:25:01.319 the top down. Right. In New Zealand, the Reserve 00:25:01.319 --> 00:25:04.480 Bank, their central bank, uses LTV specifically 00:25:04.480 --> 00:25:08.000 as a tool to cool down a hot market. The source 00:25:08.000 --> 00:25:10.059 specifically mentions what happened in Auckland. 00:25:10.299 --> 00:25:12.180 Auckland was overheating, right? prices were 00:25:12.180 --> 00:25:14.380 just skyrocketing it were so the reserve bank 00:25:14.380 --> 00:25:17.359 introduced loan to value restrictions. And this 00:25:17.359 --> 00:25:19.740 wasn't a suggestion to the banks. It was a rule. 00:25:20.019 --> 00:25:21.759 What were the restrictions? What did they do? 00:25:21.960 --> 00:25:24.460 They told the banks, you cannot lend more than 00:25:24.460 --> 00:25:26.519 10 percent of your total residential mortgage 00:25:26.519 --> 00:25:30.119 lending to owner occupiers with high LTVs. And 00:25:30.119 --> 00:25:33.359 they defined high LTV as having less than a 20 00:25:33.359 --> 00:25:36.519 percent deposit. Right. So imagine a bank issues 00:25:36.519 --> 00:25:39.920 100 loans this month. The Reserve Bank said only 00:25:39.920 --> 00:25:42.079 10 of those loans can be to people with small 00:25:42.079 --> 00:25:45.359 deposits. The other 90 must have 20 percent down 00:25:45.359 --> 00:25:48.900 or more. That is a harsh break, though. It essentially 00:25:48.900 --> 00:25:51.880 forces the banks to ration those high LTV loans. 00:25:52.079 --> 00:25:54.839 They become incredibly hard to get. It turns 00:25:54.839 --> 00:25:57.500 the safe zone into the mandatory zone for most 00:25:57.500 --> 00:25:59.819 people. And they were even tougher on investors. 00:26:00.940 --> 00:26:03.880 For investors, they restricted banks to no more 00:26:03.880 --> 00:26:06.599 than 5 % of their lending going to investors 00:26:06.599 --> 00:26:09.480 with less than a 40 % deposit. Wow. So if you 00:26:09.480 --> 00:26:11.160 want to be a landlord in Auckland, you basically 00:26:11.160 --> 00:26:13.819 need 40 % down in cash or you're out of luck. 00:26:14.000 --> 00:26:17.240 Exactly. They used the LTV ratio to deliberately 00:26:17.240 --> 00:26:19.900 choke off demand. They made it harder to buy, 00:26:20.059 --> 00:26:22.359 which cooled demand, which stabilized prices. 00:26:22.700 --> 00:26:24.900 It shows the power of this number. It's not just 00:26:24.900 --> 00:26:27.259 a line on a form. It's a volume knob for the 00:26:27.259 --> 00:26:30.579 national economy. That is wild. It's like a speed 00:26:30.579 --> 00:26:33.220 limit for borrowing. Finally, let's look at the 00:26:33.220 --> 00:26:35.779 United Kingdom. The UK is a bit of a cautionary 00:26:35.779 --> 00:26:38.119 tale. Currently, they typically range between 00:26:38.119 --> 00:26:43.000 60 % and 95 % LTV, with 95 % being pretty rare. 00:26:43.299 --> 00:26:46.460 But the source mentions a historical warning. 00:26:46.759 --> 00:26:50.339 The pre -2008 era. The pre -economic problem 00:26:50.339 --> 00:26:53.099 era, as the source politely puts it. Back then, 00:26:53.220 --> 00:26:56.559 mortgages with an LTV of up to 125 % were... 00:26:56.880 --> 00:27:00.640 Quite common. 125%. So you buy a house for £100 00:27:00.640 --> 00:27:04.640 ,000 and the bank gives you £125 ,000. Yes, you 00:27:04.640 --> 00:27:07.680 get the house plus £25 ,000 in cash to buy a 00:27:07.680 --> 00:27:10.519 car, go on holiday, renovate, whatever you wanted. 00:27:10.720 --> 00:27:14.119 That sounds insane. You are starting the loan 00:27:14.119 --> 00:27:18.099 significantly underwater. You owe 25 % more than 00:27:18.099 --> 00:27:20.700 the asset is worth on day one. In hindsight, 00:27:20.839 --> 00:27:23.259 it looks very reckless. The assumption was that 00:27:23.259 --> 00:27:25.579 property prices would just keep rising and rise 00:27:25.579 --> 00:27:27.819 so fast that you'd be back in positive equity 00:27:27.819 --> 00:27:30.079 within a year or two. They were betting on future 00:27:30.079 --> 00:27:33.640 appreciation to fix present risk. Exactly. And 00:27:33.640 --> 00:27:36.400 we all know how that movie ended. We do. Lenders 00:27:36.400 --> 00:27:39.440 stopped offering them in 2008. It's a stark reminder 00:27:39.440 --> 00:27:43.259 that LTE rules aren't laws of nature. They are 00:27:43.259 --> 00:27:47.339 choices made by institutions. And sometimes they 00:27:47.339 --> 00:27:50.539 make very bad choices. So we've toured the world. 00:27:50.559 --> 00:27:52.480 We've done the math. We've seen the traps. Let's 00:27:52.480 --> 00:27:54.319 try to bring this all together in our final segment. 00:27:54.859 --> 00:27:56.940 What does this all mean for the person listening 00:27:56.940 --> 00:27:59.299 right now trying to make sense of their own situation? 00:27:59.660 --> 00:28:01.680 I think we need to connect the dots between access 00:28:01.680 --> 00:28:04.980 and safety. There is a fundamental tension here 00:28:04.980 --> 00:28:08.099 that every country and every borrower has to 00:28:08.099 --> 00:28:10.960 grapple with. Right. High LTV means access. Yes. 00:28:11.160 --> 00:28:15.200 If you allow 95 or 100 percent LTV, you allow 00:28:15.200 --> 00:28:17.940 people with no savings, often young people, lower 00:28:17.940 --> 00:28:20.240 income families, to enter the housing market 00:28:20.240 --> 00:28:22.480 and start building wealth. That's good for social 00:28:22.480 --> 00:28:24.960 mobility. It's the dream part. But it comes at 00:28:24.960 --> 00:28:27.880 a cost. The cost is safety. High LTV loans are 00:28:27.880 --> 00:28:30.200 fragile. They are brittle. If the economic wind 00:28:30.200 --> 00:28:32.400 blows the wrong way, those borrowers go underwater. 00:28:32.589 --> 00:28:34.849 very quickly. If enough of them go underwater 00:28:34.849 --> 00:28:37.730 at once, you get 2008. You get a market crash. 00:28:38.029 --> 00:28:41.450 So low LTV is safety. Low LTV prevents crashes. 00:28:41.769 --> 00:28:43.869 It ensures everyone has skin in the game. It 00:28:43.869 --> 00:28:47.009 creates a stable, resilient market. But it also 00:28:47.009 --> 00:28:50.390 locks people out. If you mandate 20 % down everywhere, 00:28:50.710 --> 00:28:53.029 you're basically saying only people who already 00:28:53.029 --> 00:28:55.769 have money or wealthy parents can buy a home. 00:28:55.930 --> 00:28:58.329 It can entrench generational wealth. It's the 00:28:58.329 --> 00:29:01.069 gatekeeper. It is the gatekeeper. And regulators 00:29:01.069 --> 00:29:03.049 like the Reserve Bank of New Zealand are constantly 00:29:03.049 --> 00:29:05.250 turning that dial back and forth, trying to find 00:29:05.250 --> 00:29:07.190 the balance where enough people can buy homes, 00:29:07.230 --> 00:29:09.210 but the system doesn't collapse under it. its 00:29:09.210 --> 00:29:11.990 own weight. And for the individual borrower, 00:29:12.089 --> 00:29:15.170 the borrower's dilemma, as we called it. It's 00:29:15.170 --> 00:29:18.089 a very personal tradeoff. A higher LTV gets you 00:29:18.089 --> 00:29:20.109 into the house sooner. You don't have to spend 00:29:20.109 --> 00:29:22.710 five more years saving that massive down payment 00:29:22.710 --> 00:29:24.890 while rents and home prices rise around you. 00:29:25.049 --> 00:29:27.890 But it costs more. You pay mortgage insurance. 00:29:28.190 --> 00:29:30.809 You probably have a higher interest rate. And 00:29:30.809 --> 00:29:33.130 you are under a microscope regarding your credit 00:29:33.130 --> 00:29:35.849 and income. You have less freedom. Whereas a 00:29:35.849 --> 00:29:39.079 lower LTV offers freedom. It does. If you wait, 00:29:39.220 --> 00:29:41.960 save up and put 40 percent down, you get the 00:29:41.960 --> 00:29:44.619 best rates. You might get low dock options and 00:29:44.619 --> 00:29:46.480 you have instant equity. You sleep better at 00:29:46.480 --> 00:29:48.619 night. But you had to wait five years to get 00:29:48.619 --> 00:29:50.619 there. And maybe the market ran away from you 00:29:50.619 --> 00:29:53.160 in that time. So really, the LTV is a measure 00:29:53.160 --> 00:29:56.079 of patience versus risk. That is a perfect way 00:29:56.079 --> 00:29:58.740 to put it. Your personal patience versus the 00:29:58.740 --> 00:30:01.559 bank's institutional risk. OK, let's wrap this 00:30:01.559 --> 00:30:03.859 up. We've covered a lot of ground. We have. We 00:30:03.859 --> 00:30:07.140 defined LTV. We talked about the haircut, that 00:30:07.140 --> 00:30:09.960 crucial equity buffer. We looked at the valuation 00:30:09.960 --> 00:30:12.480 trap. Always remember, it's a lesser of the appraisal 00:30:12.480 --> 00:30:14.440 or the price. We looked at the risk spectrum, 00:30:14.559 --> 00:30:17.000 the safe zone under 80 percent, the danger zone 00:30:17.000 --> 00:30:20.420 over 80. And that paradox that banks sometimes 00:30:20.420 --> 00:30:24.089 prefer safer assets over safer people. We looked 00:30:24.089 --> 00:30:26.529 at CLTV, the stacking of debt. Don't forget the 00:30:26.529 --> 00:30:28.930 hidden risk in that HELOC. And we saw how the 00:30:28.930 --> 00:30:31.009 U .S., Australia, New Zealand, and the U .K. 00:30:31.049 --> 00:30:33.930 all handled this differently, using LTV as a 00:30:33.930 --> 00:30:36.130 tool for everything from social engineering to 00:30:36.130 --> 00:30:39.210 economic warfare. It's a global metric with a 00:30:39.210 --> 00:30:42.109 very local flavor. So here is my final provocative 00:30:42.109 --> 00:30:46.329 thought. We talked about how those 125 % mortgages 00:30:46.329 --> 00:30:49.470 disappeared in the U .K. after 2008. We look 00:30:49.470 --> 00:30:51.910 back at that now and we think, what were they 00:30:51.910 --> 00:30:55.450 thinking? Lending 25 % more than something is 00:30:55.450 --> 00:30:58.430 worth, it seems ludicrous. It does. It seems 00:30:58.430 --> 00:31:02.009 impossible today. But here we are. 100 % loans 00:31:02.009 --> 00:31:04.990 still exist in the U .S. via the VA and USDA. 00:31:05.210 --> 00:31:08.650 They exist in Australia with guarantors. We are 00:31:08.650 --> 00:31:11.089 still pushing that envelope. We're still trying 00:31:11.089 --> 00:31:14.849 to get to zero. So if LTV is the ultimate measure 00:31:14.849 --> 00:31:18.170 of risk, what does it say about our global financial 00:31:18.170 --> 00:31:21.250 mindset? that we are constantly trying to find 00:31:21.250 --> 00:31:24.809 clever ways to ignore the denominator. We keep 00:31:24.809 --> 00:31:26.630 trying to pretend the value doesn't limit the 00:31:26.630 --> 00:31:29.170 loan. That's a powerful question. Are we really 00:31:29.170 --> 00:31:31.250 managing risk, or are we just getting better 00:31:31.250 --> 00:31:32.950 at shifting it around so we don't have to look 00:31:32.950 --> 00:31:35.049 at it directly? Something to think about the 00:31:35.049 --> 00:31:37.130 next time you look at a Zillow listing. Don't 00:31:37.130 --> 00:31:38.690 just look at the price. Look at your equity. 00:31:39.250 --> 00:31:41.029 Because in the eyes of the bank, that's not just 00:31:41.029 --> 00:31:43.750 money. That is your risk score. That's it for 00:31:43.750 --> 00:31:45.849 this deep dive. Thanks for listening, and we'll 00:31:45.849 --> 00:31:46.670 catch you on the next one.