What Is Loan to Value Ratio (LVR)?
What Is Loan to Value Ratio (LVR)?
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What does LVR mean for me?
LVR is a percentage figure that lenders use to size up how risky a loan might be. They figure this out by calculating how much you’re borrowing compared to what your property is worth.
Wondering why lenders care about this number? Think about it from their perspective:
- They want to make sure that if you were to default on your loan, they could get their money back.
- If you were unlucky enough for this to happen, they’d recoup their losses by selling your property.
- Because property values are always changing, they like to have a buffer to make sure they can sell the property for the amount they lent you.
If your LVR is low, lenders can breathe easy.
If it’s high – usually 80% or above – that’s when lenders go into overdrive, crunching numbers and assessing the risks involved with lending to you. They might ask you to pay lenders mortgage insurance (LMI) or get a guarantor to help balance out the risk.
How do I calculate my LVR?
Here’s what the math looks like:
Divide the loan amount by the property value. Boom – you’ve got your LVR.
Imagine you’re on a mission to score your dream home, and you’re eyeing a property that’s worth $500,000.
If you’ve got 45 grand stashed away for the down payment, and you plan to borrow $455,000 from the bank (forget about other expenses like stamp duty for now), the LVR would be calculated like this:
$455,000 (your mortgage) ÷ $500,000 (the property's value) = an LVR of 91%.
Will a higher LVR make my home loan more expensive?
Most likely, yes. While each individual situation is different, a higher LVR could crank up the cost of your Home Loan because of any combination of lenders mortgage insurance, higher interest rates, and bigger mortgage repayments.
Lenders mortgage insurance (LMI)
With a higher LVR, brace yourself for an extra cost in the form of lenders mortgage insurance. It’s the lender’s safety net if things go sideways with your loan and you can’t keep up with the mortgage payments.
You generally need to pay lenders mortgage insurance if your LVR is more than 80%. So in the above example, where your LVR is 91%, it’s likely you’d have to pay lenders mortgage insurance.
But if this is you, don’t despair. In some circumstances, you can have a higher LVR without paying lenders mortgage insurance. These include things like participating in the government’s First Home Guarantee (if you’re eligible) and working in a profession like medicine or engineering.
Higher interest rates
If your LVR is on the upper end, there might be some impact on the interest front, too. Some lenders might slap on slightly higher interest rates. They could see it as a riskier venture and want to hedge their bets.
A lower LVR – say, less than 60% – can mean lenders see you as less of a risk and offer you lower interest rates.
Higher mortgage repayments
It’s simple maths: the higher your LVR, the higher your mortgage repayments. It’s the price you pay for borrowing a larger chunk of the property’s value. There’s the basic fact that borrowing more means having more to repay. But also, if borrowing more means repayment takes you longer, you might be in for more interest, too.
Can I get a Home Loan with 100% LVR?
Think of it this way: 100% LVR means you’re borrowing the property’s entire value. It’s a risky move for the lender because if things go south, they’re on the line for the entire amount.
That said, in rare instances, some lenders might still give you the nod for a home loan – yes, even with 100% LVR.
But here’s the catch: You’ll likely need a guarantor who will jump in and cover your loan repayments if you hit a rough patch.
What are the pros and cons of lowering my LVR?
Pros | Cons |
You can say hello to potential savings in thousands over the life of your home loan! A hefty deposit means you owe less – and have less interest payable. | It could take you months or years to save up a large enough deposit to satisfy your target LVR, delaying your dreams of homeownership. |
A chunky deposit can charm lenders into giving you a lower interest rate. | It could be harder for you to take care of other expenses in emergencies such as urgent medical expenses or car repairs. |
A big deposit opens up a buffet of home loan products and options to choose from. | Holding out for that larger deposit might mean playing catch-up with soaring property values. That could make securing your ideal home a bit trickier. |
How does LVR affect refinancing?
If refinancing is on the cards for you, a lower LVR can work in your favour. Here’s how it typically plays out:
- Lower interest rates: A lower LVR means you have more skin in the equity game, which means you can get better interest rates offered by lenders as they see you as less risky.
- Access to more lenders: Having a lower LVR is like telling lenders, ‘I’ve got my financial ducks in a row’. It might help you access a broader range of lenders willing to offer you refinancing options with more competitive loan terms and conditions.
- Avoiding lenders mortgage insurance (LMI): If your LVR is below a certain threshold (usually 80%), you get to avoid the need for LMI when refinancing.
On the flip side, if your current LVR is already high, getting the best refinancing terms can be a tough nut to crack. Lenders might be hesitant to offer favourable terms, and you might miss out on those sweet interest rates.
How does the property market affect LVR?
Fluctuations in the property market can directly affect the value of your property. If property values in your area increase, your LVR might go down without you having to make additional payments, potentially opening up opportunities for better loan terms. Sadly, if the value of your property decreases, the opposite can also happen.
Helpful tip:
When you’re starting to consider Home Loans, it’s a good idea to factor in your potential LVR. It can clue you in on whether lenders are likely to see your application as a dream or a walking red flag.
Knowing your potential LVR up-front can give you a sneak peek into which Home Loan options align with your financial standing. Plus, it can help you gauge whether you’re ready to take the plunge, or to steer clear of potential disapprovals (and your credit score taking a hit) for now.
Where can I find and compare Home Loans that match my target LVR?
At iSelect, we’ve teamed up with our pals at Lendi to hook you up with an easy way to find and compare home loans. Find Home Loans that can align with your target LVR today.
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