- How is LVR calculated?
When calculating LVR, your lender will use the amount of money you intend to borrow and divide it by the value of your property (either the purchase price or a price determined by their assessors).
For example - If you want to purchase a $400,000 house and you have a deposit of $40,000, to determine your LVR, the bank would use the following calculation:
$400,000 -$40,000 = $360,000 (your loan amount)
then divide $360,000 by $400,000, to get a LVR of 90%
If your LVR is over 80%, you will be required to pay Lenders Mortgage Insurance (LMI).
- Is LVR calculated differently if I'm refinancing?
Your LVR is calculated slightly differently when you are looking to refinance.
This is because the price you paid for your house may now differ from its current market value. Your bank will assess the current value of your home to calculate the refinancing LVR.
- How does the bank value my property?
When calculating LVR, your bank will take into account many factors when assessing the value of your property.
These will include factors such as house size, property size, any improvements you've made to the property, location, building condition, your local council and any new developments that are likely to occur.
- Do I want a high LVR or a low LVR?
Ideally you'll want a low LVR. A low LVR means that you are a much lower risk for a lender. This is because you have a proven history of savings (through a large deposit) and a lender can therefore be more confident in lending you money.
And if your LVR is lower than 80%, it's likely that you will not need to pay for Lenders Mortgage Insurance (LMI), which protects the lender rather than the borrower and adds to the cost of buying your property.
On the flipside - when you have a high LVR, the bank may class you as 'high risk' which could result in you needing LMI or a guarantor.
- What does a high risk LVR mean?
High risk LVR is generally considered as anything over 80% of the property value. Without at least a 20% deposit, banks may see a high level of risk in lending you money, and consequently you may need to get Lenders Mortgage Insurance (LMI) or have someone act as a guarantor for your loan.
LMI protects the lender (not the borrower) and minimises the lender's risk when they invest in you.
Similarly, a lender may accept a guarantor (parent or relative) as a security if you have a high LVR, which could help you to avoid LMI. The guarantor is responsible for covering loan repayments if you have any issues in making the repayments yourself.
- How will LVR affect my home loan?
LVR or Loan-to-Value Ratio is the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan.
Lenders place a significant emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the lender's risk.
As such, if you have an LVR that is 80% or lower, your lender may offer you a home loan that has a more attractive interest rate than a person with an LVR of 80% or above.
As a general rule of thumb, the lower your LVR and the greater the dollar amount you are borrowing, the bigger the interest rate discount you will receive.
In addition, if your LVR is 80% or under, you will be able to avoid paying costly Lenders Mortgage Insurance (LMI).
- What else affects my maximum LVR?
Each bank has their own internal policies regarding maximum LVR. Additionally, several factors can impact the maximum LVR for your property:
- Size of property: Spaces of under 40 square metres in living area are not eligible for Lenders Mortgage Insurance (LMI), so a bank is likely to set a maximum LVR of 80%.
- Property density: A lender and their insurer have a maximum number of individual properties in any one block that they will insure. This means that if you are looking to buy in a large density block with many units, you may not be able to get LMI and the bank may set a maximum LVR.
- Property location: Large rural properties may have their maximum LVR limited dependent on the size of the block. Additionally, if the block is intended as a source of income or commercial property, a lender may only let you borrow up to 60% of the property's value.
- Property value: The higher the property cost, the lower the maximum LVR.
- Heritage listed property: A lender may reduce the maximum LVR depending on any restrictions on property in regard to use and renovations.
- Low doc: These are generally assessed on a case-by-case basis, however low doc home loans will carry a lower maximum LVR.
If you think any of these situations may apply to you, contact one of our Mortgage Choice home loan experts to discuss your individual situation.