If you own a home or are thinking about purchasing your first house, you may have heard of the term: loan to value ratio (LVR). Your LVR plays a significant role in your home buying experience, so it pays to understand exactly what it is.
Definition of Loan to Value Ratio
Loan to Value Ratio (LVR) is the percentage of the property value that you are borrowing. For example if you have a $100,000 unit and you borrow $80,000 then you have an 80% LVR.
As a general rule of thumb, the higher the LVR is the higher the risk to the lender and so the more conservative their assessment is likely to be.
Assessment of Property Value
In order to work out your LVR, the property you are looking to purchase must first be valued.
When valuing a property, there are many things a valuer will take into account, including:
- The size of your dwelling as well as the size of the land that the property stands on
- The type of property the dwelling is (eg: unit, house, semi, commercial office etc)
- The location of the property
- The condition of the property
Impact of Loan to Value Ratio on Mortgage Loans
The lower LVR you have, the less risk you pose to the lender, as such, they may be inclined to reward you with sharper rates, higher ongoing discounts and better package deals.
If possible, it is beneficial to have an LVR that is 80% or lower. By having an LVR that is 80% or less you will also be able to avoid paying Lenders Mortgage Insurance. Mortgage insurance is a method that lenders use to reduce the risk associated with lending a high portion of the value of a home. People who borrow 80 percent or more of the value of a home are required to pay lenders mortgage insurance.
Calculate your LVR and speak to a mortgage broker today.
Recently asked questions
|How much deposit do I need for a home loan?|
|How do I finance buying my next home if I haven't sold my current home?|
|How do I know if I'm eligible for the First Home Owner Grant?|
|What does a mortgage broker do?|