GUIDES & RESOURCES

Loan To Value Ratio (LVR)

If you’ve been thinking about buying your first home, chances are you’ve come across the loan to value ratio. We’ll run through what it means for you and your home loan search.

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From a lender’s perspective, the loan to value ratio (LVR) is a calculation that lenders use to see how much risk they would take on with a secured loan.

Let’s take a look at how this percentage is calculated, and more importantly, what it could mean for you.

What is a loan to value ratio (LVR)?

The LVR is a number that is used to compare the size of your home loan with the total value of the property you’re buying.

If you’re buying your first home, then your LVR could be determined by the size of your deposit against the total value of your home.

How is an LVR calculated?

The typical formula is:

Loan amount / property value X 100

Here’s an example to give you a more practical understanding:

Let’s say you’re purchasing a home that’s valued at $500,000, and you decide to submit a deposit of $100,000. This means your loan amount would be $400,000.

LVR = $400,000 / $500,000 X 100

0.8 X 100 = 80

 = 80%

How is the property value calculated?

Lenders generally get a valuation of the property done by a professional property valuer.

Does my loan to value ratio affect the amount I can borrow for my home loan?

Yes, the higher the LVR on your proposed loan, the less likely your lender is to grant you the home loan.

Remember – from the lender’s perspective, the LVR determines the amount of risk they would take on in terms of having the loan fully repaid by you.

So, an LVR of 80% would be a lot more appealing to a lender than an LVR of 90%, which indicates a higher risk for them.

Is there a maximum LVR for which lenders would accept loan applications?

While the LVR is not the only factor that affects your success in securing your home loan, it’s still an important one, because lenders generally won’t let customers borrow more than they’re able to repay. There are industry regulations in place that require lenders to make decisions in the borrower’s best interests.

Most lenders have a maximum LVR they’ll approve on their home loans, so it’s important you pay attention to this number when you’re comparing options.

Here’s another example:

If a lender has a maximum LVR of 80% and the property you’d like to purchase is valued at $500,000, then the most the lender would let you borrow would be $400,000.

This means you would need to supply a deposit amount of $100,000.

Should I pay attention to the LVR when I compare home loans?

Yes, it would be a good idea to know how much a lender would actually be willing to lend you before you apply for a home loan with them.

If your application is rejected, then your credit score could take a big hit as well.

You can learn more about credit scores at Moneysmart.

What are the pros and cons to lowering my LVR?

Pros

Cons

1. If you submit a larger deposit, then you would have less to repay and therefore be charged interest on a much smaller loan amount. This could save you hundreds or even thousands throughout the lifetime of your home loan.

1. It could take you months or years to save up enough money for a large enough deposit that satisfies your target LVR.

2. You could get a lower interest rate on your home loan.

2. It could be harder for you to take care of other expenses in emergencies such as urgent medical expenses or car repairs.

3. You could have a broader range of products to choose from.

3. Spending more time saving up for a larger deposit could mean that property values continue to increase and therefore make it harder for you to secure your ideal home loan.


Will I also need to pay lenders’ mortgage insurance (LMI)?

It’s possible that you would need to pay for LMI, especially if your LVR is over 80% or 90%, or your deposit amount is less than 20% of the property value.

LMI basically helps protect your lender in case you default on your home loan.

Another example:

Say you’d like to purchase a property valued at $500,000, and you’d like to submit a deposit of $50,000.

Let’s calculate your LVR.

Loan amount = $450,000

LVR = $450,000 / $500,000

= 0.9

= 0.9 X 100

= 90%

In this case, it’s likely you’d have to pay for LMI, as your deposit is less than 20% of the property value.

LMI is typically added to your home loan repayments, and you may also incur interest on top of your LMI.

As you can see, there’s lots to consider, so it’s worthwhile comparing home loans to find a suitable option for you.

Where can I compare home loans?

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your home loan. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last updated: 15/03/2022

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