Today we are looking at the term “LVR” in Part 5 of the mini masterclasses on Financial Literacy. The term LVR stands for “Loan to Value Ratio”. The LVR is basically calculated by taking the loan amount and dividing it by the value of the property, and then multiplying it by 100 to get it into a percentage.
All banks like to use the calculated Loan to Value Ratio (LVR) to determine the risk associated with a home loan or investment. Most banks like the LVR to be below 80%, which basically means the buyers need to make a 20% deposit leaving an 80% lend. This allows the bank to have a 20% buffer if they need to repossess the home and sell it off quickly, particularly if the customer has continually defaulted on their loan repayments.
Most good interest rates that are offered by the banks will apply to loans with an LVR less than 80%. When the loan is over 80%, the bank will charge LMI, which stands for Lenders Mortgage Insurance. The LMI fee acts as a buffer or insurance for the bank, due to a smaller deposit amount which would be less than 20% in these cases. The interest rate offered for loans over 80% LVR will also be higher due to the bank seeing it as a high risk loan.
So, where possible, it is best to have a 20% deposit as this will get you a better rate and you will avoid paying LMI. However, a lot of full-time investors don’t mind paying LMI as they want to preserve capital (i.e. the other 10% deposit) and use it for their next investment purchase. The reason for this is that the investor is more interested in making money from capital growth (appreciating value) from their investment property, rather than saving money on LMI at the front end of the deal.
In conclusion, LVR’s are very important when it comes to lending and that is where your Mortgage Choice loan consultant can give you the best advice when it comes to buying your own home or investment property. If you have any further questions, please be sure to give us a call at Mortgage Choice Blaxland & Penrith.
Blaxland Office Ph: 0247 399749 or Penrith Office Ph: 0247 211733