How to calculate your loan to value ratio (LVR)
Banks use two numbers to calculate your LVR:
- The first number is the loan amount you’re applying for
- The second is either the purchase price or bank valuation of the amount of the property.
Whether a bank will use the purchase price or a bank valuation to calculate your LVR depends on the circumstances of your loan. Some banks will use the whichever figure is lower. Other banks will use the price on the Contract of Sale, providing your LVR is 80% or less and the loan is under $800,000.
To calculate the LVR, a bank will divide the home loan amount by the purchase price or property value. Here’s an example LVR scenario:
Let’s say you’re planning to purchase a property that has been valued at $500,000.
You’ve saved a 20% deposit of $100,000, and so you need to borrow $400,000.
Your LVR is calculated as follows:
$400,000 ¸ $500,000 = 0.8 (or 80%).
Based on this calculation, your LVR is 80%.
A common misconception is that the LVR is a static number. Far from it. Your LVR ratio will fluctuate as the value or price of your property increases (or decreases) or if you decide to borrow more or on your existing mortgage for example.
What is a good LVR?
This is a good question and the answer will probably differ depending on who you ask. The lower your LVR, the less risk you represent to a bank. That means you’ll be in a much stronger position when applying for a home loan. Ideally, you should save as much as possible to reduce your loan amount and your LVR ratio.
But what LVR should you aim for?
From a bank’s perspective, you’ll need between a 5-10% minimum deposit, which puts your LVR at around 90-95%. Some banks may loan to buyers with no deposit at all if they have a guarantor behind them this could be considered a high-risk strategy for all parties. If you take out your home loan with Beyond Bank, you’ll need at least 10% deposit (or 5% for first home buyers), which we believe is a much safer minimum.
From a buyer’s perspective, aiming for an 80% LVR or less means that you could save yourself thousands of dollars by avoiding the dreaded Lenders Mortgage Insurance (LMI).
Why is LVR so important?
Even though LVR is used by banks, it’s useful for buyers too. Knowing where you want to land with your LVR calculation can help you answer all sorts of bigger questions. Should you buy now or keep saving diligently to reduce your ratio? How much of your deposit should you hold back for other expenses such as stamp duty and legal fees? And perhaps even whether you’re financially ready to buy. Your LVR calculation will also affect your wallet in a number of ways:
- How much LMI you’ll need to pay – The higher your LVR calculation (80% and above), the more LMI you’ll have to pay. In turn, that means less of your precious savings could end up going towards your home deposit.
- Your loan approval – Your LVR calculation is a big factor in whether your home loan application is approved. A lower LVR means that the loan is less risky to banks, because there’s more equity in the property.
- Higher mortgage repayments – With a higher LVR, you are likely to have higher mortgage repayments to cover each month. You can use our home loan repayment calculator to get an estimate of your repayments.
- Fewer borrowing options - If you have a high LVR, you’ll have fewer borrowing options and less flexibility in your home loan. Fewer borrowing options could mean that your loan ends up costing you more.
- How much more you can borrow – Your LVR will influence how much you might be able to borrow down the track. So, if you’re planning to re-mortgage and borrow more money for things like renovating your property in a few years, you’ll need to bear this in mind.
How to use LVR to work out your target property value.
Another way that LVR is useful to buyers, is that it can help calculate what ballpark property price or value to aim for.
Let’s say you’ve saved up a deposit of $150,000 and would like no more than an 80% LVR to avoid paying Lenders Mortgage Insurance. To achieve a maximum LVR of 80%, your deposit needs to be at least 20% of the property price or valuation. In this scenario, that would mean your property can be priced or valued at no more than $750,000.
If $750,000 is below the kind of property you’re considering, you’d need to either increase your LVR or hold off until you’ve saved up a bigger deposit.
Important note: If the $150,000 you’ve saved also needs to cover things like stamp duty and legal fees, the actual deposit you have available will be less. Make sure you factor this in before you do your LVR calculation.
Lending criteria apply to all loans, for full terms, conditions, fees and charges, please review our Financial Services Guide, Product Guide and Fees and Charges Guide. These guides are available here and will be provided at the time of acquiring the product or by contacting 13 25 85.
This information has been provided without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness, having regard to your objectives, financial situation and needs. All loans are provided by Beyond Bank Australia Limited, 100 Waymouth Street, Adelaide, SA 5000 ABN 15 087 651 143 AFSL/Australian Credit Licence 237856. © 2019.