If you are in the market for a home loan, you would have probably come across several new terms, including LVR.
LVR is short for Loan-to-Value Ratio, which refers to the amount of money you plan to borrow, expressed as a percentage of the value (or the purchase price) of the property you are buying.
Lenders generally use LVR to determine how much of a risk you pose as a borrower if they lend money to you. The higher the LVR, the greater the risk to the lender because it means you are providing little security (or deposit) for the loan. To minimise their risk, most lenders require you to provide a minimum amount of security to qualify for a home loan, which is generally 20% of the purchase price.
How is LVR calculated?
LVR is calculated by dividing your loan amount by the purchase price or the property’s value. This figure is multiplied by 100 to express the ratio as a percentage. If the purchase price is different from the property valuation, the lender is likely to use the lower of the two to calculate your LVR.
If you wish to borrow $500,000 and your property is valued at $600,000, your LVR would be calculated as:
($500,000/$600,000) x 100 =83%
A simpler way to calculate LVR when you are taking out a home loan is by considering it as the part of your property’s value that is not your deposit. So, if your deposit equals 10% of the property’s value, your LVR would be 90%. It means you are borrowing 90% of the property’s value.
How does your LVR affect your home loan application?
Calculating your LVR before applying for a home loan can help you in several ways. If you have researched even a little on home loans, you probably know that you need to put up an upfront deposit to qualify for a home loan with most lenders.
The minimum deposit requirement is generally 20% of the property’s value or purchase price. It means you can expect to qualify for a loan with an LVR of 80% if you fit the other eligibility criteria laid down by a lender. However, if you are applying for a higher LVR loan, your application might get rejected, or you’ll need to pay for Lenders Mortgage Insurance (LMI), depending on the lender’s policies.
Knowing your LVR can thus help you decide whether you should apply for a home loan or continue saving for a larger deposit. It could also help you estimate your LMI fees and whether it’s worth spending this additional money or saving some more to apply with a larger deposit.
A higher LVR not only increases the lender’s risk but can also strain your finances. A high LVR loan means you are borrowing more than 80% of the property’s value, which could lead to higher mortgage repayments. If you are paying LMI, it’s could add a few thousand dollars (depending on the size of your loan) to your upfront costs or further increase your debt if you choose to roll in the LMI fees into your home loan. As you are considered a risky borrower when you apply for a mortgage with a high LVR, you are also likely to have fewer borrowing options available to you.
LVR and refinancing
Your LVR is an important ratio that lenders consider when you apply for a home loan. It also comes into play if you wish to refinance your home loan down the line. Generally, your LVR tends to change as you continue paying off your home loan principal.
As your equity in the property grows, your LVR should gradually reduce, which could help you secure a lower interest rate if you plan to refinance your home loan. However, if you refinance your home loan with an LVR over 80%, you might need to pay for LMI to your new lender, irrespective of whether you paid for LMI on the original loan. Depending on the size of your loan and the interest rate difference, paying for LMI again could eat into any savings you hope to make by refinancing. A mortgage broker could help you crunch the numbers to figure out when refinancing might be a good option for you.
Is it possible to take out a high LVR loan without paying for LMI?
Applying for a loan with a high LVR often means fewer borrowing options in the market. You might also need to pay extra in the form of LMI to qualify for a high LVR loan. However, it’s possible to negotiate an LMI waiver if you belong to certain professions. For instance, doctors and lawyers can usually borrow up to 90% of a property’s value without paying for LMI. However, such deals or discounts are not widely advertised, but mortgage brokers are usually aware of what’s on offer and can help you find a competitive home loan deal that meets your unique requirements.
There are other options as well, such as guarantor home loans, which can allow you to take out a high LVR loan without paying for LMI. However, this usually involves your parents or a close relative using their home equity to guarantee your loan. Such an arrangement involves financial risk for the guarantor, and you run the risk of a relationship turning sour if you are unable to meet your loan commitments. A mortgage broker can inform you of the benefits and drawbacks of such an arrangement to help you make an informed choice.
