LVR, or Loan to Value Ratio, is a key factor in home loans. It’s used to calculate the size of the loan compared to the value of the property. It’s an important concept to understand when it comes to securing a mortgage. One of the most significant investments for many of us is buying a home, and this can be daunting when trying to make sense of all the financial terminology. A frequently heard term when seeking a mortgage is LVR, which stands for Loan-to-Value Ratio. Here in this article, you’ll get an understanding of LVR, from how to work it out to why it’s essential to securing your dream home – whether you’re getting onto the property market for the first time or wanting to refinance your mortgage loan. In short, here’s all you need to know about LVR.
Introduction to LVR in Home Loans
When you’re applying for a home loan, the lender will evaluate your loan to value ratio (LVR). This ratio compares the amount of money borrowed with the worth of the property. For example, if you want to buy a house worth $500,000 and you have a $250,000 deposit, then your LVR would be 50%. The lower your LVR, the more chance you have of getting approved for a loan and the better interest rate you’ll likely receive.
If you wish to purchase a home valued at $500,000 with a $250,000 down payment, then your loan-to-value (LVR) ratio would be 50%. The better your LVR is, the higher your possibility of getting approved for a loan and the more favorable the interest rate. Most lenders will require an LVR of 80% or less for owner-occupied loans and 95% or less for investment loans. That means if you want to buy a $500,000 house as an investment property and you have a $250,000 deposit, you would need to borrow $475,000 which would give you an LVR of 95%.
What is Loan to Value Ratio (LVR)?
When you apply for a home loan, the lender will evaluate your Loan to Value Ratio (LVR). This is a comparison of your loan amount to the worth of the property. If the ratio is high, it signals increased risk to the creditor, with Lenders Mortgage Insurance (LMI) potentially required if your LVR is over 80%.
To calculate your LVR:
Loan amount ÷ Property value = LVR
If you plan to borrow $300,000 against a property worth $500,000, then your loan-to-value ratio (LVR) would be 60%. However, if you only have a 5% deposit ($25,000), this figure would jump to 95%, making it necessary for you to purchase lenders mortgage insurance. The importance of your LVR goes beyond whether or not you have to pay for insurance. It also affects the mortgage rate you’re offered by lenders. The higher your LVR, the higher the interest rate will be. This is because loans with a high LVR are considered to be higher risk. So if you can increase your deposit and reduce your LVR, you’ll end up with a lower mortgage rate and could save thousands of dollars over the life of your loan.
How Is LVR Calculated?
To ascertain your loan-to-value ratio, divide the loan amount by the property’s appraised value. As an example, if you’re getting a loan of $150,000 to buy a home that was valued at $200,000, then your LVR would be 75%. If you’re looking to get a home loan with a low interest rate, you’ll need to have a good LVR. Many lenders will only offer their best rates to customers with an LVR of 80% or less. This means that you’ll either need to save up a larger deposit or find a property that’s cheaper than the one you had your heart set on.
Remember, if your property value decreases and your LVR rises above 80%, you may struggle to refinance with another lender down the line. That’s why it is so important to keep tabs on your LVR.
Why Is LVR Important?
LVR is vital when considering your equity in your residence, how much of your home’s value you can utilize for borrowing and the additional cost of private mortgage insurance (PMI) without a 20 percent down payment. Higher LVRs represent more risk to the lender, thus usually leading to increased interest rates on your loan.
How Does It Affect Your Home Loan Application?
Mortgage lenders are particularly interested in the Loan to Value Ratio (LVR) when assessing a home loan application. This ratio translates the amount of money taken out as a loan in comparison to the value of the property being bought. Having an elevated LVR signals a higher risk for the lender, as there is little equity if things don’t go as planned. There are a number of ways to calculate LVR, but generally speaking, it is calculated by taking the loan amount and dividing it by the value of the property. For example, if you are looking to purchase a home worth $500,000 with a $250,000 mortgage, your LVR would be 50%.
Lenders generally prefer an LVR of 80% or less, as it suggests a reduced risk for them. If your LVR is higher than this, you may still be eligible for a home loan but you’ll likely have to pay Lenders Mortgage Insurance. This insurance offers protection to the lender if you fail to meet repayments.
Tips on Keeping Your LVR Low
Making a larger than required down payment is a great way to reduce your loan and, therefore, your LVR. For instance, if you are buying a $400,000 property and you have saved up $80,000 as a 20% deposit then your loan would be for $320,000 with an LVR of 80%. However, if you were to increase that deposit to $120,000, your loan would drop down to $280,000 and consequently your LVR declines by 10%, coming in at 70%. Another way to keep your LVR low is by making extra repayments on your loan. Each time you make a repayment, it reduces the amount of money you owe and therefore also reduces your LVR. For example, if you have a $300,000 loan at an 80% LVR and make a repayment of $10,000, your new Loan balance will be $290,000 and your LVR will drop to 96.7%.
You can lower your LVR by negotiating to purchase the property at a lower price. This can lead to needing to borrow less money, ultimately giving you a lower LVR. Finally, remember that the lower your LVR is when you apply for a home loan, the more likely it is that you will be approved for finance and the better the terms of your loan are likely to be.
Alternatives to Lowering Your LVR
If you don’t want to lower your loan-to-value ratio, there are still some options available to you. You could make higher repayments on your home loan, giving you more equity and reducing your LVR over time. Alternatively, a shorter loan term through refinancing will help reduce the principal faster and effectively decrease the LVR as well. Lastly, selling off some of your property could also help to pay down the mortgage balance and reduce the loan-to-value ratio. No matter which routes you take, it’s important that you research thoroughly and consult with a financial advisor before making any big decisions.
Conclusion
For anyone in the market for a home loan, it’s important to take into account the LVR. Gaining an understanding of this concept is key to selecting the ideal mortgage and amount to borrow. With some knowledge about what comprises LVR, you can successfully make use of this factor in choosing a suitable home loan that meets your demands.
FAQs
- What is an LVR?
The Loan to Value Ratio (LVR) measures the amount of a loan compared to the worth of property and is typically expressed as a percentage.
2. How is LVR calculated?
To calculate the LVR, divide the loan amount by the value of the property. For instance, with a loan of $100,000 and a property worth $200,000, your LVR would be 50%.
3. What is a good LVR?
When it comes to “good” and “bad” Loan-to-Value Ratios (LVRs), there is no straightforward answer. Generally, a lower LVR is preferable as it indicates that you have decent equity in your property. But lenders may view a higher LVR as more risk-prone since it implies less equity for them, leaving you more vulnerable to defaulting on your loan.
4. Why is LVR important?
Lenders use LVRs to determine loan risk, often resulting in a higher interest rate for a high LVR and vice versa. A lower LVR could indicate decreased risk, which typically corresponds to a diminished interest rate.
5. What are some tips for maintaining a low LVR?
Some tips for maintaining a low LVR include reducing the loan amount, saving to increase your deposit, increasing the value of the property or shopping around for a better deal.