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There can be a lot of confusing terms floating about when it comes to home loans, and LVR is just one of them. Here we’ll explain what it is, why you need to know about LVR and how you can reduce your LVR.
Loan to Value Ratio, or more commonly known as LVR, signifies what portion of the total value of a property a person is borrowing.
For example, if you are buying a property worth $200,000 and have a $50,000 deposit, then your LVR is 75% because you are borrowing 75% of the value of the property.
A borrower’s LVR is hugely important to lenders. It can impact the rate you’ll qualify for as well as the amount a lender is willing to lend you. Borrower’s with a lower LVR are viewed as lower risk by lenders.
LVR is calculated by dividing your loan amount by the value of the property, then multiplying by 100.
Loan to Value Ratio (LVR) formula:(Loan amount / Value of property) x 100 = LVR
For example, if you took out a $500,000 loan for a house worth $600,000, then your LVR would be $500,000 divided by $600,000 which is 83%.
It’s always better to have a lower LVR. Borrowers with a low LVR are in less debt and are considered low risk by lenders.
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Lenders assess a number of things when considering a home loan application and a borrower’s LVR is just one of them. Lenders evaluate LVR before approving a home loan in order to determine the amount of risk involved.
If your LVR is high (greater than 80%), the loan may be considered higher risk. Generally, the lower your LVR, the more equity you hold in the property and the better your likelihood of being offered a lower interest rate.
If your deposit is less than 20% of the assessed value of the property, your LVR will be greater than 80%, and your lender may require you to pay Lenders Mortgage Insurance (LMI) in order to have your loan approved.
Find out how to avoid paying Lenders Mortgage Insurance here.
Yes, there are lots of lenders that offer loans to borrowers with high LVR. Of course this all depends on your lender as well as your specific financial situation, employment history and credit rating.
It is important to note that since your deposit is less than 20% of the property purchase price your lender may still require you to pay Lenders Mortgage Insurance on top of your loan repayments.
A low LVR can have many benefits including avoiding paying LMI and potentially accessing better interest rates. There are a number of ways you can lower your LVR including:
The first way to lower your LVR is to simply wait and try to save a larger deposit
Another option is to buy a property with a lower purchase price
Ask a guarantor, usually a parent, to use some of the equity in their own home to secure part of your loan. Chat to a Home Loan Specialist to discuss this option further
If you want to avoid paying LMI, check if your profession is considered low risk. Some lenders consider professions, such as doctors, engineers and accountants, as low risk and will sometimes waive the LMI fee for these applicants.
It depends. If the purchase price is lower than that of the valuation, the lenders will often choose the lower of the two in order to determine the loan to value ratio. This is a common occurrence in off the plan purchases, where the contract was signed before the value of the property increased.
This can also happen when a property is purchased from a family member at a discounted price, also known as favourable purchasing. It’s worth noting that some lenders will use the value of the property for instead of the purchase price in favourable purchases. The borrower will still need to pay stamp duty on the value of the property.