If you’re 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. For those of you who don’t know, LVR refers to ‘Loan to Value Ratio’. If you come across the term LTV this means the same.
The loan to value ratio is a lending assessment ratio that a lender uses to calculate the level of risk for a lender. Assessments that have a higher LVR are usually considered as a higher risk than those with a lower value.
A loan to value ratio is calculated by dividing 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 the lender 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 the 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 divided by $300,000 multiplied by 100, which equals 90 percent.
Most lenders in Australia require you to have an LVR of 80 percent or lower. If your LVR is higher than this then a lender can do one of two things. They can either decline your home loan or they will approve your home loan, but ask you to pay lenders mortgage insurance (LMI). LMI can be very costly and can add thousands to the cost of your home loan.
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 percentage, we find that this equates to 20 percent of the property’s value. This means that you now only need to borrow $240,000 to buy the home and that the property’s LVR has fallen to 80 percent. Buy 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.
Do you want to know more about LVR? If so, then contact eChoice TODAY.