Understanding LVR and how it’s calculated

What is LVR?

LVR, or Loan to Value Ratio, is a number that expresses the loan amount being borrowed to the ratio of an asset being purchased. In simple terms, that is the ratio of your home loan to your new property.

LVR is used by lenders to calculate how much of a risk you pose as a borrower. Generally, the lower the LVR, the better, with an 80% LVR being the ideal figure for most lenders.

How is it calculated?

Your LVR is decided by two things – the value of the property you are buying and the amount of deposit you have saved. The higher your deposit, the lower your LVR.

To calculate your LVR simply divide the loan amount by the property value. You can estimate the size of the loan you’ll need by subtracting the deposit amount from the property value.

How LVR can affect your loan?

High LVR

As we mentioned before, lenders consider a low LVR to be better than a high one. This is because you will likely pose a lower risk to the lender and will need to borrow less. You may also find that having a high LVR will lock you out of lower interest rates, or that you’ll end up having to pay LMI (Lender’s Mortgage Insurance).

While having a high LVR won’t necessarily prevent you from getting a loan altogether, you might find it significantly harder. Many lenders offer loans up to 90-95% LVR, with stricter lending conditions and a requirement to pay LMI. Some specialist lenders even offer 100% LVR loans. These kind of loans are uncommon, however, and have very particular requirements for the borrowers who are interested in them.

Low LVR

With a low LVR, you will find it much easier to have your home loan approved by your chosen lender.  You’ll generally have access to lower interest rates and may even have room to negotiate a discount. And since you’d be considered a lower risk to the lender you can save money on LMI too.

How can you ensure a low LVR?

1. Save early and well. Set your financial goals early to ensure you’re on track to purchase when you’re ready. A history of savings will not only lead to a bigger deposit, but will also help with your application. Make a realistic budget and stick to it as best you can, and you’ll be well on track to meet your goals.

2. Get a guarantor. A guarantor can help lower your LVR by using the equity in their own home as security against your loan. But while a guarantor can increase your borrowing capacity, you should be extra careful to only borrow what you can afford, as missed repayments will affect more than just you.

3. Work with an expert. Working with a broker can help you ensure that you’re getting the best loan for your personal financial situation.