In this weeks Know Your Loan, Jason Coviello explains what the Loan to Value Ratio (LVR) is, and why it's so important in assessing how much you can borrow.
If you have been researching home loans you might of heard the term Loan To Value Ratio or LVR being thrown around.
If not, then it’s something you need to get your head around, because the LVR , along with servicability, are the two most important things the bank looks at when assessing your ability to borrow.
Loan To Value Ratio (LVR)
To understand what LVR means and why your hard earned 20% deposit isn’t actually 20%, it’s better to first understand how the lender calculates your loan as a percentage of the purchase price of the property and what this means to you.
The lender uses a ratio called the Loan To Value Ratio, or LVR,
This is used when determining whether Lenders Mortgage Insurance (LMI) is payable and as one of the tools to measure the strength of your application.
For this example let’s assume that you are looking to purchase a property for $500,000 and you have saved $100,000 (20% of the purchase price) in the hope of avoiding the dreaded LMI.
The LVR would be calculated as;
The Purchase Price $500,000
Stamp Duty $17,765
Mortgage Registration $135
Transfer Registration $250
Application Fee $600
Minus Your Deposit $100,000
The total loan amount $418,750
Purchase price $418,750 / $500,000
The Loan To Value Ratio 83.75%
You can see that with the extra fees and stamp duty added on top, the loan is 83.75% of the value of the property, meaning the original deposit only comes to 16.25% of the purchase price.
Why you should know your LVR
In general whenever the LVR is more than 80% of the purchase price LMI would be payable. In this case the LVR is over 80% so LMI would be payable and therefore increase the overall loan amount you will require from the lender.
Of course if you are a first home buyer in Western Australia you are eligible to apply for an exemption from paying the stamp duty allowing your deposit to go further.
How knowing your LVR will save you money
In addition to avoiding LMI and saving cash by making sure your LVR is below 80% your application will also be much stronger in the eyes of the bank.
A larger deposit shows that you have good saving habits and are more likely to be able to repay the loan over time.
Also, generally speaking most lenders will offer greater discounts on things like the interest rate or application fee for those applications where the LVR is 80% or below.
So when looking at your options and deciding on a savings plan to reach your goal of a 20% deposit, remember to factor in the relevant fees and charges that will apply to the loan.
Want to know how the LVR affects you?
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You might also be interested in:
- How much deposit do I need to avoid mortgage insurance
- The Home Loan Process
- How much do you have to pay a mortgage broker
*All fees and charges quoted were correct at the time of publishing and are for illustration purposes only and not to be relied upon for mortgage purposes.