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Understanding Home Loans – Loan to Value Ratio (LVR)

home loan

During the whole home loan journey you will find so many terms that you might not understand, I hope in this BLOG I can share with you some understanding about a really important one – “LVR”. I hope to walk through exactly what it means to you (the customer), what it means for the lender’s, what impact LVR can have in the whole process, we will also walk through what are your deposit requirements and some tips to help you out along the journey.

LVR

LVR stands for Loan to Value Ratio, to put it simply it is the amount the bank will allow you to borrow in comparison to the value of the property. I have put an example below to help you understand this a little better

Purchase price of the Property = $450,000

Bank A will loan 90% of the purchase price = $450,000 X 90%

= $405,000 is the amount the bank will loan you

Bank B will loan 95% of the purchase price = $450,000 X 95%

= $427,500 is the amount the bank will loan you

So in a nutshell, LVR is the allowable limit a bank will lend to its customer(s).

Now we know what the LVR is, let’s see what it means for you as a customer. The difference between the LVR and what the bank will loan you is the amount you need to come up with as a deposit to complete the loan. What also needs to be taken into account is the loan mortgage insurance. Loan Mortgage Insurance (or LMI) is generally always included in your maximum borrowing.

Typically LMI represents 3% of total purchase price. Using example b on a purchase of $450,000, LMI would represent approximately $13,500 (450,000 x 3%). If the maximum loan amount is $427,500 then $13,500 is LMI then the client must come up with approx. $36,000 ((427,500 – 13500) – 450,000) to complete the purchase. LMI is often forgotten about when people are looking to purchase or build a home. What is important is factoring in any fees or stamp duties.

Lenders vary in what they will loan to you in a LVR, the majority of lender’s will loan up to 95% of the purchase price with some going as high as 97% for current clients and there are also options up to 98% LVR with some restrictions. LVR to a lender represents the risk the bank have in the loan they are entering into with you as the customer, to combat this if you have a higher LVR and less of a deposit you will pay a higher amount of LMI. So as you can understand it is in your best interest to have a higher deposit and lower the amount you need to borrow from the lender.

A couple of things to remember if you have a high LVR are:

  • Your application is subject to approval from both the bank and the Mortgage Insurer
  • It may mean you have a higher interest rate
  • Anything above 80% will mean you need to pay LMI
  • You may be limited the number of lender’s you can potentially use

From the list above the opposite is true if you have a lower LVR, the point now for you is to make sure you have your destiny in your own hands and save as much as you can for a deposit, this will ensure that you are successful in your home loan goals, get a better product and have more equity at the start of the process.

Tips to remember along the way:

  • Set a savings goal
  • The higher the purchase price the more you need as a deposit
  • Engage an expert early in the process so you know exactly what you need to do and what deposit you will need
  • Keep debts to a minimum
  • Keep your debts up to date and paid on time

Needless to say that your deposit goes a long way to determining your LVR. It is important to note that not all banks are the same and there is no way to overcome the LVR limit.

Give us a call if you would like to know more!

All the best!

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