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What is Loan to Value Ratio (LVR)
The Loan-to-Value Ratio (LVR) is a financial metric used by lenders to assess the risk associated with a particular loan. It's expressed as a percentage and represents the ratio of a loan amount to the appraised value of the property being purchased or refinanced. In simpler terms, it measures the amount of a loan compared to the value of the property securing the loan. Loan-to-Value Ratios are used in mortgage lending, where they play a crucial role in determining loan eligibility, interest rates, and loan terms.
How to Calculate LVR:
To calculate your Loan to Value Ratio (LVR), divide your loan amount by the property value, then multiply by 100 to get a percentage.
For example, if the property you would like to buy is valued at $800,000 and you're borrowing $640,000 with a $160,000 deposit, your LVR would be 80%.
The above equation would look like this: $640000 (loan amount) / $800000 (value of property) x 100 = 80% (LVR)
Why is your LVR Important?
When evaluating your loan application, your Loan-to-Value Ratio is a critical factor for lenders in assessing risk. Lenders use it to determine the amount of equity a borrower has in a property and to gauge the level of risk associated with the loan.
Generally, the lower the LVR, the less risky the loan is considered by the lender. Conversely, a higher LVR indicates a greater risk for the lender. Your LVR has a significant impact on your loan terms and conditions such as interest rates, and the requirement for Lenders Mortgage Insurance (LMI).
What is a Good LVR?
Many lenders consider an LVR of 80% or lower to be advantageous. Achieving this requires a deposit representing at least 20% of the purchase price. A lower LVR signifies less risk for the lender, enhancing your chances of loan approval. Therefore, it's advisable to aim for substantial savings to reduce both your loan amount and your LVR ratio.
If your LVR exceeds 80%, you'll typically incur Lender's Mortgage Insurance (LMI) when securing a home loan.
LMI serves to safeguard the lender—not the borrower—in case of default on home loan repayments. It's a one-time payment that can either be settled upfront during loan approval or added to the total loan amount.
The amount of LMI charged depends on various factors, such as:
The loan amount
Your deposit (for instance, a borrower with a 5% deposit will pay more than one with a 10% deposit)
The property's intended use
Your employment stability and status
The insurer chosen by your lender.
Furthermore, certain circumstances and situations may lead to LMI fee waivers. For instance, first home owner concessions or home loans tailored for specific professions often offer discounted LMI or waive the fee entirely.
Using LVR to determine a property purchase price:
Another way that the LVR calculation benefits buyers is by enabling buyers to estimate their purchase price of a property they would like to buy.
For instance, suppose you have saved a $160,000 deposit and aim to keep your LVR below 80% to avoid Lenders Mortgage Insurance. To maintain a maximum LVR of 80%, your deposit must account for at least 20% of the property price or valuation. In this scenario, this means your property's price or valuation should not exceed $800,000.
If $800,000 falls short of the type of property you have in mind, you may need to either adjust your LVR or postpone your purchase until you've saved a larger deposit.
It's important to note: If your $160,000 savings also need to cover expenses like stamp duty and legal fees, your available deposit will be lower, to cover these additional costs. Be sure to consider these factors before conducting your LVR calculation.
For assistance with calculations such as stamp duty and home loan repayments, check out our helpful home loan calculators.
In conclusion, the Loan-to-Value Ratio (LVR) is a fundamental concept in mortgage lending that measures the relationship between the loan amount and the appraised value of the property. It serves as a key denominator of loan eligibility, interest rates, and loan terms, with lower LVR’s generally indicating lower risk for lenders. Borrowers should understand the significance of LVR ratios and explore strategies to manage and optimize them to achieve their financial goals.
If you are planning to purchase or refinance a property, talk to us to see what options you have available.
