Everything you need to know about home loan LVRs
The world of home loans is full of different terms that property buyers need to understand before securing a mortgage. This can be a bit overwhelming at first, but once you get beyond the many acronyms floating around, the basic principles are relatively simple to grasp, and will help you secure the perfect home loan to suit your needs.
One of the most important terms relating to home loans is LVR, which stands for Loan to Value Ratio. This ratio can have an enormous impact on whether or not you are able to get approval for a home loan, and the different types of loans that you’ll be eligible for.
What is a Loan to Value Ratio?
Your LVR is calculated as a percentage, and to put things as simply as possible, it represents the amount you’ll need to borrow in order to purchase a property. If you’re buying a $500,000 home, and have $100,000 saved up as a deposit, you will need to take out a loan for the remaining $400,000. This would make your LVR 80 per cent, as you have a deposit large enough to cover 20 per cent of the total price, and a home loan will cover the remainder.
So far so simple! However, when calculating your LVR, it’s important to take into account the other fees and costs that will crop up as part of the property buying process. For example, stamp duty, legal fees, building inspections, council/utility rates and any renovations or repairs that may be required. These can add up to a significant amount, and if you haven’t accounted for them in addition to your deposit, you may find that you have a higher LVR than you were expecting once the extra fees have been taken care of.
Why is my LVR important?
So, now that you know exactly what your Loan to Value Ratio is, the next question is, why does it matter? There are three key reasons why knowing what your LVR will be important:
- It will determine your eligibility for a loan. Lenders have restrictions on maximum LVRs they will provide loans for. This could be different across all lenders, but currently on average, it will be around 90%, meaning you will need a minimum 10% deposit of the property value. If your LVR will be higher than this, it might automatically make you ineligible for a home loan.
- It will determine if you need to pay Lenders Mortgage Insurance (LMI). LMI is a mandatory requirement when a LVR is going to be greater than 80%. LMI is an insurance premium that must be paid by the borrower. So if your LVR is going to be above 80% you will need to take this into account when considering how much money you will need to cover additional expenses and costs associated with a purchase. Most lenders, including Beyond Bank, will allow you to capitalise (add to the loan) the LMI premium, however this will increase your loan balance and the interest you are charged on the loan. Also, adding the premium to your loan may also take your LVR above the maximum allowable which could impact your loan eligibility.
- It might impact the interest rate you are eligible for. Most lenders will offer different interest rates based on what the LVR is. Generally speaking, the lower the LVR, the lower the interest rate. Knowing what your LVR is going to be will be vital before you start looking at interest rates
For these reasons, a lot of buyers elect to save a larger deposit, and secure a more favourable home loan. This might mean you have to delay your dream property purchase, but will likely save you money in the long run. Here at Beyond Bank we offer loans to a maximum LVR of 90 per cent with a range of different interest rate options. Waiting until you have a deposit worth 30 per cent of a property value (and therefore an LVR of 70 per cent), will make you eligible for home loans like our Variable Low Rate Home Loan.
For more information on the ins and outs of home loans, get in touch with Beyond Bank today. Our team will be more than happy to walk you through every step of the process.