Loan to value ratio: What you need to know about LVR
What is LVR and why does it matter?
When it comes to buying a property, and particularly purchasing your first home or investment, the thrill of house-hunting can soon become a confusing mess of banking terms – offset accounts, fixed or variable rates, and of course LVR.
What is LVR?
LVR is an abbreviation of loan-to-value ratio. The LVR is essentially the proportion of the property purchase that will be funded by a mortgage, and it is calculated as a percentage.
For example, if you are buying a $500,000 property and you have saved $50,000 to use as a deposit, your deposit equates to 10 per cent of the purchase price, and you would need a mortgage to cover the rest. As such, your LVR would be 90 per cent.
Why your LVR matters
Knowing your LVR is an important calculation for any home buyer to consider, as it will affect how much you can borrow.
Lenders have a cap on the LVR they are willing to loan at, which mostly falls between 80 and 95 per cent. This acts as a safeguard for the lender in the event that the value of the property falls.
Generally speaking, it can be better to aim for as low an LVR as possible, as this not only reduces the amount you have to borrow, but it gives you more equity in the property.
Having equity in your property provides a great deal of financial flexibility, as you can tap into this equity in future to buy an investment property, redraw to cover the cost of renovations or use it for other purposes such as a family holiday.
What does LMI stand for?
Another three-letter acronym you’ll need to be aware of is LMI, which stands for lenders mortgage insurance. This type of insurance is designed to protect the lender but is paid for by the borrower.
Most lenders will insist that LMI is taken out on all loans where the LVR is higher than 80 per cent. So while you may be able to borrow up to 95 per cent of the property’s value, you may be required to pay a bit extra for LMI in order to secure the home loan.
When it comes to putting together a list of questions to ask your lender, be sure to ask about their maximum LVR. Knowing this key figure will tell you exactly how much you can borrow and hence set your budget for finding a suitable property to call your own.