Loan Value Ratio (LVR), can sometimes be confusing to home buyers, especially new buyers as they enter the property market for the first time. It’s very important to have a clear understanding from the start of what LVR means and what it provides in respect to your borrowing capacity.
The Seek Financial team have put together information that will hopefully give you a clearer understanding about what LVR is, how it’s calculated and why it’s so important in your quest to buy property.
What is Loan Value Ratio?
The loan-to-value ratio (LVR), is the value of a property compared to the amount of money you wish to borrow in a home loan. It applies to all finance options – residential, investment, Commercial or SMSF lending. LVR is one of the main areas lenders look at when assessing the risk factor of your loan. The higher the LVR percentage, the higher the risk the loan is to a Lender.
How is LVR calculated?
To find out the LVR, Lenders will divide the loan amount by the property’s value. The valuation method can either be a walk-in valuation (actual Valuer) or a desktop valuation, depending on the lenders preference. This then determines the percentage value, which is your LVR.
For example, if you want to buy a $600,000 property and have a $60,000 deposit, you would need to borrow $540,000, this is considered a 90% lend. If you had a $120,000 deposit, you would only need to borrow $480,000 and this would be an 80% lend.
The table below shows further LVR examples based on a $500,000 property value.
Why does LVR matter?
LVR is very important as it affects whether you need to pay Lender’s Mortgage Insurance (LMI). LMI is payable for any lends above 80% as a one off, non-refundable, non-transferrable premium that is added to your home loan. LMI protects the lender against any loss incurred if you cannot repay your loan.
In addition, if your LVR is 80% or lower, you will have access to lower rates than if your LVR is 81% or above. For the overall best deal, you should try to achieve an LVR of 80% or less.
Although not practical for everyone, it’s often better to have a 20% deposit before looking to buy a home. The minimum deposit required under normal circumstances is generally 5%, which has been genuinely saved over a period of 3 months or more.
At Seek Financial, we work through all aspects of the lending process with you – from the start of your journey, through to the handover of your property and beyond. We pride ourselves on building long term relationships with our clients, providing ongoing support and advice where needed. Our expert team has extensive knowledge of an industry that’s policies and processes evolve and change frequently. Please don’t hesitate to contact us if you are looking at buying your first home or have any questions about LVR or the home loan process, we’d love to help.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.