Loan to Value Ratio (LVR)

When purchasing a home, the lenders will ask you about the purchase price & deposit - to find out what your LVR is.

An LVR advises which portion of the loan will be borrowed, and which portion will be paid in the form of a deposit. Essentially, it shows the lenders how much you will need to borrow as a percentage - in order to also work out how much you will need to deposit.

For Example: an 80% LVR indicates to the lender, that you will need to borrow 80% against the value of your property.

If your property is valued at $500,000 and your LVR is 80% - the lender will allow you to borrow $400,000, leaving you with the 20% deposit of $100,000.

Your LVR is one of the first steps in the Home Loan process; before a lender can allow you to borrow, they will take a number of things into consideration.

Lenders will do this to evaluate the level of risk you bring to them as a borrower. The lower your LVR is, the less risk it is to the lender, as you are borrowing less from them. Due to this, the lenders will ask you to provide information about your past and current circumstances such as - income, savings, assets and liabilities (debt) and more.

The Lower your LVR is, the better - for two main reasons: Firstly, you present less risk to the lender as the borrower. The higher your LVR, the higher risk your borrowing is for the lender as you will be applying to borrow a large portion of your property. On the other hand, the lower the LVR - the less risk for the lenders.

Secondly, the lower your Loan to Value Ratio is, the more equity you will have in your property from the beginning. If you’re borrowing 60% as opposed to 80% you will have 20% more equity in your property at the start, as you have paid a higher deposit - meaning you could be able to access your equity sooner than later.

If your LVR is higher than 80%, you will most likely need to pay a fee called Lenders Mortgage Insurance, or LMI for short.

LMI is a fee charged to borrowers with an LVR over 80% to protect the lender - as you are a higher risk borrower. This is to secure the lenders in case the borrower makes their repayment when it is overdue - which is called a default on their home loan. LMI can be paid upfront as a once off fee upon Settlement, or can be added to the loan amount.

The LMI fee that the lenders charge are based on certain factors, such as your lenders insurer, the properties purpose, the size of your loan & deposit and more.

There are circumstances where LMI can be waived such as current government concessions for first home buyers and certain employments/professions.

However, it is still possible to be approved for a Home Loan with an LVR above 80%, keeping in mind the LMI fee, your loan amount and repayments will increase and the lender may be hesitant to offer you a lower interest rate.

If the challenge should arise of your LVR being too high - these are some measure you can take to lower your LVR over time.

Saving a bigger deposit is always an option of course - if you are patient in your property purchase and wish to do so.

Purchasing a different property that has a lower purchase price will naturally decrease the LVR and amount you need to borrow as the value of the home will be lower.

Having a guarantor on the loan is also a way of potentially lowering your LVR. This involves another person - usually a member of your family, offering up part of the equity in their home as a security for the deposit shortfall.

You could potentially be lucky enough to receive a monetary gift from your parents or other family & friends, which is most common with First Home buyers - as long as you declare this money as a gift and are not obligated to pay this money back.

For More Information about LVR’s or Other Home Loan Enquiries - Feel free to reach out to us.