If you are looking at obtaining a home loan, then you’ve probably encountered the acronym LVR and wondered what this stands for and how it applies to you. Don’t worry you’re not alone. Many home buyers have been or are in the same situation as you. So, for those of you who don’t know, LVR refers to Loan to Value Ratio’.
What Does LVR Mean?
LVR is written as a percentage of the amount that you are borrowing compared to the value of the property. This a lending assessment ratio that a lender uses to calculate their level of risk when receiving a home loan application. The higher the LVR, the greater the risk. Consequently, lenders look for LVR’s that are around 80% of the property’s value or lower.
Home loans under 80% of a property’s value, typically won’t attract Lenders Mortgage Insurance (LMI). However, those over 80% will have to pay this insurance, unless they can offer assets as security over the loan.
How Much Does LMI Cost?
To calculate LMI multiply your LMI rate by your loan value. For instance, let’s say you’re borrowing $300,000 and your LMI rate is 0.932%. Then your LMI is $2,796, plus any stamp duty applicable in your state. Of course, LMI rates differ from lender-to-lender, so you’ll need to ask what your lender’s rate is prior to applying for a loan.
How Can I Calculate LVR?
To calculate LVR on a property that you’re interested in buying, use the following formula:
Divide the amount you need to borrow, also known as the loan’, by the appraised value of the property you’re looking to buy, also known as the value’, and then multiplying this by 100 to give you a percentage.
For example, let’s say you’re seeking to buy a home worth $300,000 and you have a deposit of $30,000. To calculate LVR, you would firstly take your $30,000 deposit away from the home’s $300,000 buying price to calculate the loan amount; this works out to be $270,000. Thus, the loan to value ratio would be:
$270,000 (loan) divided by $300,000 (property value) multiplied by 100, which equals 90% LVR.
Do I Use the Property Value or Purchase Price to Calculate LVR?
Sometimes the property price and the valuation price are different. If this is the case, then use the lower value to calculate LVR.
A lender typically uses the lower value to determine LVR, as does their mortgage insurer. So, if you want an accurate calculation, then it’s advisable for you to do the same.
When Does a Lender Use the Lower Value to Calculate LVR?
Often a lender uses a lower value to calculate LVR when you buy a property that’s under construction. Off-the-plan purchases, for instance, may increase or decrease in value since the date of signing the contract. This scenario typically occurs due to fluctuations in the market.
For example, let’s say you buy an off-the-plan apartment for $330,000. Twelve months later when you need to settle on the property, the bank valuation comes in at $380,000 due to the market value increasing.
Another time that a valuation may vary to the purchase price, is when a family member is selling a property to another member of the family for less than market value. This type of purchase is known as a favourable buy. In this instance, some lenders use the valuation price. Although, lenders will only use the valuation price on a contract of sale signed more than 3-months before the date of loan application.
Do All Lenders Need a Property Valuation?
Not all lenders will ask for a full property valuation, which typically cost between $250 and $450 each. Some lenders won’t worry about a property valuation if the property already satisfies their lending criteria. Other lenders will use a desktop or computer-generated assessment.
A lender usually orders a property valuation if:
- You have an LVR of over 80%.
- You’re not the only person buying the property.
- Your loan is more than $800,000.
- You cannot supply full income evidence.
- The property’s location is in a regional area.
- The dwelling is off-the-plan.
- You are related to the vendor.
- You’re not buying through a licensed real estate agent.
How Can I Reduce My LVR?
To reduce your LVR, you need to save more as a deposit for your home purchase. Let’s say that you save $60,000 instead of $30,000 to buy a $300,000 property. Using the same formula we did previously to calculate this as a percentage, we find that this equates to 20% of the property’s value. As a result, you now only need to borrow $240,000 to buy the home and the property’s LVR has fallen to 80%. Also, by having a larger deposit, you have decreased your risk as you have more equity in your property. It is also likely that you’ve saved thousands in LMI as you may not have to pay this cost.
Can I Borrow 100% LVR?
It is possible to borrow 100% LVR when you have assets to secure a loan, such as another property that has a high equity value, or when another party acts as your guarantor. As you pay off the property’s principal and reduce the loan to under 80% of the property’s value, then the need for security will no longer apply. Just remember, that a loan with an LVR of 100% is very high risk compared to a loan with an LVR of 80%. Also, with a guarantor loan, you are risking someone else’s home as well.
Can a Lender Restrict My LVR?
A lender can put a cap on your maximum LVR if you are a high-risk borrower. High-risk borrowers are those who have defaulted on an earlier loan, or who have a low credit rating and blemishes on their credit file. To avoid this, look at clearing-up your credit history.
Are you looking to calculate your LVR and find out your borrowing power? If you said YES, then it’s time to discuss your options with eChoice and speak to a home loan expert. Our brokers have access to 100’s of products across a panel of lenders. So, we’ll find a competitive mortgage for you.