Loan to Value Ratio (LVR) guide
Hello there! We're Buyvest, your go-to experts in property finance. We've been helping Aussies for over a decade understand all the nitty-gritty details in buying a property, and today we're here to make sense of the Loan to Value Ratio (LVR).
What's Loan to Value Ratio all about?
Think of Loan to Value Ratio (LVR) like this - It shows how much of a property's value you're borrowing from a lender. To figure out your LVR, divide your loan amount by the property’s value, then multiply by 100 to turn it into a percentage. For example, if you want to borrow $400,000 for a house worth $500,000, your LVR would be 80%.
LVR Formula LVR = (Loan Amount ÷ Property Value) × 100
Why should you care about Loan to Value Ratio?
Loan to Value Ratio (LVR) is important because it tells your lender how risky your loan might be. A high LVR (like borrowing most of the property's value) can be risky for lenders. A low LVR means less risk as you're not borrowing as much compared to the property’s value.
Loan to Value Ratio in different situations
Your Loan to Value Ratio (LVR) can change depending on what you're up to:
Refinancing: Your lender will take a fresh look at your property's value to work out the new LVR.
Buying your first home: Remember to add in extra costs like stamp duty when you're working out your LVR.
Construction loan: Here, your LVR is based on what your property will be worth once everything is built and ready.
Using a guarantor loan: If you've got a guarantor, the value of their property gets added into the mix when working out your LVR.
The best Loan to Value Ratio
A lower Loan to Value Ratio (LVR) is usually better. Aim for a LVR of 80% or less if you can. Why? Because it often means you won’t have to pay extra for Lender's Mortgage Insurance (LMI). If your LVR is over 90%, it's seen as riskier, especially if property prices go down.
Knowing your LVR helps you make smarter choices about borrowing for a property. Whether you're refinancing, buying for the first time, building a home, or thinking about a guarantor loan, understanding your LVR can lead to better loan terms.
Loan to Value Ratios and how it affects your loan
At Buyvest, your local mortgage broker and adviser in the lending landscape, we're here to guide you through understanding maximum LVR offered by lenders. The LVR can vary depending on several factors, and it's essential to know how they might affect your loan.
Factors that can influence maximum Loan to Value Ratio
Property size: Lenders often have specific LVR limits for smaller properties, such as those with a living area below 40 square meters.
Property concentration: If you're looking to invest in multiple units in the same building or block, be aware that lenders might limit the LVR to reduce their risk.
Property value: For high-value luxury properties or larger rural properties, you might find that lenders set a lower maximum LVR.
Location: The location of your property, especially if it's in certain areas or used for commercial purposes can influence the LVR limits set by lenders.
Low doc loans: If you're applying for a loan with limited traditional income documentation, expect to see a lower maximum LVR from lenders.
It’s vital to remember that these factors can differ among various lenders. For the most accurate and tailored advice, Contact Buyvest, experts in mortgage broking and with our deep understanding of the specifics of different lending institutions. We will ensure you get the best deal possible.
Lenders Mortgage Insurance and its role in Loan to Value Ratio:
Lenders Mortgage Insurance (LMI) is closely linked to Loan to Value Ratio (LVR). Usually required for loans with an LVR above 80%, LMI is a protection for lenders in case of loan default. It's important to note that the cost of LMI can be added to your loan amount, affecting your final LVR.
Refinancing for a better Loan to Value Ratio:
If your property's value has increased since you got your loan, refinancing could be a smart move. A new property valuation might reveal a higher value, potentially lowering your Loan to Value Ratio and opening the door to more favourable loan terms.
Why lenders pay attention to Loan to Value Ratio:
For lenders, Loan to Value Ratio (LVR) is a key metric in evaluating the risk of a loan. A higher LVR suggests a greater risk of loss if you default, and the property must be sold. Lenders balance this risk against their return, often preferring loans with lower LVR, as they're seen as less risky.
Navigating the world of LVR can be complex, but understanding these factors can help you make informed decisions about your property investment.
Understanding Loan to Value Ratio and its importance for borrowers
At Buyvest, we believe in empowering borrowers with knowledge. One critical concept you need to understand is Loan to Value Ratio (LVR). It's more than just a number; it's a key factor in your loan journey. Here’s why LVR matters to you as a borrower:
Getting your loan approved: LVR is a big deal for lenders. If your LVR is too high, it could mean a 'no' from them. So, it's crucial to have a good-sized deposit to fit within their LVR limits.
The role of Lenders Mortgage Insurance (LMI): Here's the thing about LMI – it kicks in when your LVR is over 80%. It's an extra cost to protect the lender, not you. And yes, it can bump up your total mortgage cost quite a bit.
Your interest rate is linked to LVR: High LVR usually equals higher interest rates. Lenders see it as a riskier bet and charge you more in interest to cover that risk.
Missing out on special offers: Got your eye on a lender's cashback offer or other perks? A high LVR might mean you're not eligible. Lenders often reserve these sweet deals for borrowers with lower LVR.
How can you get a better Loan to Value Ratio?
Lowering your Loan to Value Ratio (LVR) not only opens doors to better loan terms but also saves you money. Here's how you can do it:
Boost your deposit: Saving more increases your deposit, thereby lowering your LVR.
Guarantor loan: Using a guarantor can help secure a loan with a lower LVR.
Home Guarantee Deposit schemes: Explore schemes that offer assistance with your deposit.
Affordable property: Choosing a cheaper property initially lowers your LVR.
Tap into existing property equity: Using equity from another property can serve as a deposit, effectively managing your LVR.
Accurate property valuation: Ensure your property is valued correctly; a higher valuation can reduce your LVR.
Seek expert advice: Navigating home loans can be tricky – so reach out to Buyvest for expert advice.
LVR is a big player in the home loan game. It affects everything from whether you get the loan to how much you pay each month. By managing your LVR strategically, you can improve your chances of loan approval and access better rates and offers.
Frequently asked questions about Loan to Value Ratio
What is considered a good LVR?
Generally, an LVR of 80% or lower is considered good as it allows you to avoid Lenders Mortgage Insurance. However, the "best" LVR depends on your circumstances. Some lenders offer their most competitive rates to borrowers with LVRs of 60-70%, while others may have special programs for first home buyers with higher LVRs.
How does LVR affect my interest rate?
Lenders typically offer tiered interest rates based on LVR bands. For example, a lender might offer their lowest rate for LVRs under 60%, a slightly higher rate for LVRs between 60-80%, and their highest rates for LVRs above 80%. The difference can be significant—sometimes 0.5% or more between the lowest and highest LVR tiers.
Can I get a home loan with a 95% LVR?
Yes, many lenders offer loans with LVRs up to 95%, meaning you only need a 5% deposit. However, these loans typically require Lenders Mortgage Insurance, which can add thousands to your borrowing costs. Alternatively, eligible first home buyers might access the Home Guarantee Scheme, which allows 95% LVR loans without LMI.
How much does Lenders Mortgage Insurance cost?
LMI costs vary based on your loan amount and LVR. As a rough guide:
- For a $500,000 property with a 90% LVR (10% deposit): Approximately $8,000-$15,000
- For a $500,000 property with an 85% LVR (15% deposit): Approximately $5,000-$9,000
These costs can either be paid upfront or capitalized into your loan amount (which increases your LVR slightly and results in paying interest on the LMI premium).
Does LVR matter after I get my loan?
Yes, your LVR continues to matter throughout your loan term. It affects your ability to:
- Refinance to a better deal
- Access equity for renovations or other investments
- Remove Lenders Mortgage Insurance (some lenders will consider waiving LMI if your LVR drops below 80% through property value increases or principal reduction)
- Negotiate better rates with your existing lender
How often is LVR calculated?
LVR is calculated when you apply for a loan and whenever you request changes to your lending arrangements, such as refinancing or applying for additional funds. Lenders don't automatically recalculate your LVR as your property value changes or as you make repayments, but you can request a revaluation if you believe your LVR has improved.
Can I have different LVRs for different properties?
Yes, each property and its associated loan has its own LVR. If you own multiple properties, each will have a separate LVR based on its specific loan amount and property value. However, lenders may consider your overall portfolio LVR when assessing new loan applications.
How does LVR affect investment property loans?
Investment property loans often have stricter LVR requirements than owner-occupied loans. While you might find owner-occupied loans with LVRs up to 95%, investment loans might be capped at 80-90% LVR. Additionally, interest rates for investment loans typically increase more significantly at higher LVRs compared to owner-occupied loans.
Can I negotiate LVR requirements with lenders?
While the basic LVR calculation isn't negotiable, you may be able to negotiate exceptions to a lender's standard LVR policies based on your overall financial situation. For example, if you have an excellent credit history, stable employment, and strong income, a lender might be willing to offer more favourable terms despite a higher LVR.
How does LVR affect my borrowing capacity?
Your LVR directly impacts how much you can borrow. With a lower LVR, you might be able to borrow more relative to your income because:
You'll likely qualify for lower interest rates, improving your serviceability assessment
Lenders may apply less stringent assessment criteria for lower-risk, low-LVR loans
You'll avoid LMI costs, freeing up more of your borrowing capacity for the actual property purchase
Making Informed Decisions
Understanding LVR empowers you to make strategic decisions and sometimes, entering the market sooner with a higher LVR might be financially advantageous if property values are rising rapidly. In other market conditions, waiting to save a larger deposit and achieve a lower LVR might be the better strategy.
Consider both the immediate costs (like LMI) and the opportunity costs of delaying your purchase. With a solid understanding of LVR and its implications, you're better equipped to navigate the home loan landscape and secure terms that align with your financial goals and circumstances.
At Buyvest, we're here to guide you every step of the way. Whether you're refinancing or buying a new home, understanding your LVR is crucial. So, reach out to us, your local mortgage broker and adviser, and let's make sure your loan journey is a smooth one.
Table of Contents
A lower Loan to Value Ratio (LVR) can help you secure better rates and avoid costly fees.
We show you how to make your LVR work in your favour.
Important stuff:
Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
Any advice and information is provided by Buyvest Pty Ltd ABN 91 684 841 496, Australia Credit Licence No. 567392 and is general in nature, for educational purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without considering your objectives, financial situation or needs. Therefore, consider the appropriateness of the advice for your situation and needs before taking any action. It should not be relied upon to enter into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy. If any financial product has been mentioned, you should obtain and read a copy of the relevant Product Disclosure Statement and consider the information contained within that Statement concerning your circumstances before deciding whether to acquire the product. You can obtain a copy of the PDS by emailing hello@buyvest.com.au. If you want to change your financial circumstances, such as applying for a loan, all loan applications are subject to credit approval.
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