Loan to Value Ratio is one of those things you’ll hear about a lot in the world of home loans. It’s important because it may affect your borrowing power. So, what is LVR?
The Loan to Value Ratio (LVR) is the amount you need to borrow as a percentage of the total value of the property.
Let’s break it down a bit more. Here’s an example (for illustrative purposes only), where the value of the property is the same as the purchase price:
• Let’s say the value of the property is $500,000
• You have a $100,000 deposit.
• This means you need to borrow $400,000 to buy the property.
LVR is calculated by dividing the amount of your home loan by the value of the property we have as security like this:
Note: the above example includes fees such as stamp duty, Bank/Legal fees and Govt. fees.
There are a few upfront fees and costs you may have to pay when buying a house. If you haven’t taken these costs into account, you may end up having less money left for your deposit. The less you have for your deposit, the higher your LVR will be. Speak with us about how the upfront fees may work in your situation and for your impending purchase.
Why is a low LVR considered better? From the lender’s perspective, a lower LVR generally carries less risk as the lower the LVR the more equity you have in your home and the less you need to borrow from the bank.
A lower LVR is also good news because it usually means you will have more equity in your home right from the start (equity is the difference between a property’s value and the amount you owe on it. Using the example above if your house is worth $500,000 with a home loan of $400,000 – you will have $100,000 of equity in the property).
If you want to borrow more than 80% of the property’s value, there will be added costs that you will need to consider. This is because some borrowers with a LVR of over 80% are required to pay a Lender Mortgage Insurance (LMI).
Lender Mortgage Insurance (LMI) covers the Bank’s costs and risk when lending over 80% of the sale price of the security property. There are different tiers, but generally speaking the higher your LVR, the higher the LMI cost.
There are some Lenders on our panel that view this differently to the 80% rule, so speak with us about what your scenario is so we can provide you with some information more fitting to your situation.
When deciding whether to offer you a home loan and what the rate of interest should be, a lender will use a bank valuation of the property to calculate the LVR.
A professional valuer performs a bank valuation. It may be different than estimated market value provided by a real estate agent, because the bank must ensure that they don’t lend more than the property’s true value.
The bank valuation is an estimate of what the lender might be able to recover from the sale of the property if the borrower was no longer able make repayments on the home loan.
A market estimate (or market valuation) is an estimate of how much the home will sell for in the Australian property market. Your real estate agent may base a market estimate on recent sale and purchase prices – rather than long-term trends. An estimate may also assume that the seller is willing to wait to get the best price.
We are here to give you guidance throughout your home buying journey, speak with us for more information today on 1300 665 906.
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Bill has over 26 years of experience working in the finance industry. He has worked across a number of different businesses including Home Loans, Personal Loans, Collections and Insurances. Bill's passion is to utilise his knowledge and experience in the industry to assist clients in meeting their financial goals.
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