Know how much equity you have in your home.
A Loan-to-Value Ratio is the size of a loan compared to the value of a property expressed as a percentage.
You can find this out by dividing the amount you'll need to borrow to purchase a property by the property's value. If you buy a property for $500,000 and need a loan amount of $300,000 to purchase it, your LVR will be 0.60, or 60% when expressed as a percentage. Scroll down to see this equation used in a common example.
LVRs are important when it comes to getting a mortgage. Generally, the lower the LVR, the lower the risk you present to your lender. Also, lower LVRs often qualify for cheaper interest rates. Generally, a loan of 80% or less is recommended, as borrowing more leads to more fees and charges and the possibility of higher interest rates.
To work out your property's value, a lender will order an independent property valuation. The loan amount is simply the amount you need to borrow to purchase the property.
Both your property value and your loan amount can rise and fall. Property values fluctuate with the market value of the property, whereas the loan amount can rise if a borrower borrows more or redraws. Making principal repayments reduces your loan amount, as does making additional repayments.
The size of a deposit (or existing equity when refinancing) is what determines an LVR. The larger the deposit saved compared to a property value, the lower the LVR.
How to calculate your Loan-to-Value Ratio
David has saved up $35,000 to use as a deposit and he wants to know the maximum price of a property he can purchase while avoiding LMI. His $35,000 deposit therefore has to represent at least 20% of the value of the property. To calculate an 80% LVR, David multiplies his deposit amount by five , which works out to be $35,000 x 5 — giving him an upper property price limit of $175,000.
David can’t spend more than $175,000 on buying a property without the need for LMI. With a property price of this value, his home loan would be $140,000 ($175,000-$35,000).
|Property Value||$175 000||100%|
|Loan Amount||$140 000||80%|
Use your LVR to determine your price range
Using a home loan calculator, you can calculate your maximum budget for a property based on the average maximum LVR accepted and the amount you have saved up for a deposit. While this in no way guarantees that you will be approved for all the home loans you apply for, it is a good starting point.
Let’s assume that you have saved up $35,000 to use as a deposit and you're hoping to take out a loan with no higher than 80% LVR, so your $35,000 has to represent at least 20% of the value of the property. Using a home loan calculator, we see that the value of the property should not exceed $175,000 and the maximum home loan you can get is $140,000.
Of course, just because your LVR is within acceptable bounds, there's no guarantee that your application will be approved, as there are many other variables involved including your financial position.
In certain situations, you can obtain a loan with a little or no deposit, but you need to have a guarantor. With guarantor home loans, you can sometimes obtain as much as 100% of the property’s value but remember that you are risking someone else’s home in the process, so make absolutely certain you are in a financial position to make the repayments on time. You can use an online home loan calculator to help you work out how much your repayments will be to ensure you can afford it.
Maria and Luke
Maria and Luke have been married for almost three years now and have been saving for their deposit. They opened a savings account to assist them and have managed to save $25,000. If the house they are looking at is $250,000 they have 10% of the house value as deposit. This is a 90% LVR.
By borrowing 90% of the value of the property Maria and Luke will be required to take out lenders mortgage insurance (LMI). This is to protect the bank if they are unable to pay and default on the loan. Find out how they could have avoided paying LMI here.
If you are struggling to save up a deposit for your first house, you could potentially borrow up to 95% of the value. This is a high LVR home loan. You should compare the loans below if your savings are low and you are looking to get into the property market.
How does an LVR affect me?
An LVR determines:
- The level of equity in your property (the part you own outright)
- Whether you will pay LMI and, potentially, a higher interest rate
- How much more you can borrow against your property. Say, for adding stamp duty and LMI to the loan amount for instance, or to borrow to renovate.
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