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If you're looking for a home loan you may have come across the term LVR and wondered about its meaning. Loan to value ratio (LVR) is used to determine how much you are borrowing in relation to the value of your property.
Understanding LVRs helps you compare home loans and find one that matches your deposit size. It can help you avoid applying for a loan that isn't suitable.
The meaning of LVR, or loan to value ratio, is the value of a property minus the deposit a borrower has saved. Loan to value ratio is expressed as a percentage. If you have an LVR of 80% this means you have a 20% deposit saved and must borrow the remaining amount.
It's a common term in the mortgage industry for determining how much someone can borrow in relation to their deposit size. Every home loan product has a maximum LVR, which indicates to a borrower how big your deposit should be in proportion to the value of the property you are buying.
Take a look at any home loan in Australia and you will see two loan to value ratios listed alongside details like the interest rate and comparison rate. These are maximum LVR and maximum insured LVR.
The difference comes down to lenders mortgage insurance (LMI). This is a premium lenders charge to borrowers when there are deposits below 20% of a property's value. In other words, when the LVR is higher than 80%.
LMI can cost thousands of dollars, but it does help borrowers buy properties with smaller deposits. And this is why home loans have two LVRs.
The maximum insured LVR lets borrowers know if the loan is available with a deposit below 20%. The maximum LVR refers to the deposit size you will need without paying lenders mortgage insurance.
The maximum LVR on most Australian loans is 80% or lower. But the maximum insured LVR can be 90% or 95%.
Here are two examples:
Loan to value ratios are simple to calculate. You need two numbers: your property value and your loan amount (or deposit size).
Let's say you are buying a $600,000 property. Your deposit is $100,000, therefore your loan amount is $500,000.
Now you can determine the LVR percentage by dividing the loan amount by the property value. Here's how to calculate it:
Here are some LVR examples in a table, using different property values and deposit sizes.
Property value | Loan amount | Deposit | LVR |
---|---|---|---|
$500,000 | $400,000 | $100,000 (20%) | 80% LVR |
$500,000 | $425,000 | $75,000 (15%) | 85% LVR |
$700,000 | $490,000 | $210,000 (30%) | 70% LVR |
$700,000 | $630,000 | $70,000 (10%) | 90% LVR |
$900,000 | $810,000 | $90,000 (10%) | 90% LVR |
$900,000 | $720,000 | $180,000 (20%) | 80% LVR |
$1,000,000 | $950,000 | $50,000 (5%) | 95% LVR |
$1,000,000 | $800,000 | $200,000 (20%) | 80% LVR |
We've covered LVR for home buyers but what if you have a home loan and want to refinance your mortgage? LVR matters for refinancers too but it's slightly different.
Instead of a deposit, you need to calculate your home equity. This is the value of your property minus your remaining home loan debt. Before you break out the calculator do the following:
Once you have those two numbers you can work out your equity and determine your current LVR. Here's an example:
And then you can work out your LVR: (400,000 ÷ 800,000) x 100 = 50%.
With an LVR of 50%, a refinancer would likely be eligible for most home loans, given that so many home loans have a maximum LVR of 80%. Provided your income and spending proves you can continue making repayments, you should have no trouble refinancing with such a strong LVR.
If your LVR is 90% and you apply for a home loan with a maximum insured LVR of 80% your application will be rejected or the lender will recommend a different product. That's why it's important to understand your LVR.
The lower your LVR, the bigger your deposit is relative to your home loan. This makes it easier to get a home loan. As mentioned above, borrowers with low deposits (that is, deposits under 20%) usually have to pay lenders mortgage insurance.
Compare low deposit home loans with LVRs above 80%
Having a lower LVR and a bigger deposit can make your home loan application easier. Lenders view borrowers with 20% deposits as lower risk prospects. If you are applying for a home loan with just a 5% deposit a lender may look more closely at your income, debts and expenses or ask you for more information to establish your financial position.
Of course, if you've calculated your costs and think you're better off buying a property sooner, it can be worth it. Once you have bought a property you can start paying it off and building equity. For some buyers, getting onto the property ladder faster is worth the extra cost.
You can. While they aren't as common as loans with 80% to 90% maximum insured LVRs you can definitely find loans with 95% LVRs. These loans are available with just a 5% deposit, meaning you can jump into the property market with a much smaller deposit saved.
Here's an example to show just how much smaller a 5% deposit is.
Property value | 5% deposit | 20% deposit |
---|---|---|
$500,000 | $25,000 | $100,000 |
$700,000 | $35,000 | $140,000 |
$900,000 | $45,000 | $180,000 |
A long time ago (well, before the 2008 Global Financial Crisis), lenders were actually giving some borrowers 100% of the value of a property. Those days are over, but there is an exception for some lucky borrowers: a home loan with a guarantor.
Many lenders will lend you above 95% if your parents own a property and are willing to act as your guarantor. This means they agree to be responsible for your mortgage (or part of it) if you can't repay your loan.
It's a risky option. In the worst case scenario a borrower defaults on their loan and the parents are forced to sell their own house to cover the debt. But if everyone involved in the arrangement understands the risks and gets independent financial advice it can work out well.
Using a guarantor lets you avoid LMI too.
First home buyers who meet certain eligibility criteria can also get a home loan with a 5% deposit using the federal government's First Home Loan Deposit Scheme.
This scheme allows eligible buyers to borrow 95% of the property's value. The main benefit is that you can avoid paying LMI because the government will act as your guarantor.
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