Loan To Value Ratio (LVR) In Property Finance

Knowing this simple acronym can significantly impact your ability to buy or refinance a property. By understanding LVR, you’ll learn how much you can borrow, secure the best interest rates, and understand the risks associated with borrowing. It’s amazing how three little letters can mean so much.

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What is LVR?

LVR stands for Loan-to-Value Ratio. It’s the proportion of the loan amount to the property’s value. If your LVR is 80% or below, you might borrow more money at lower rates and enjoy lower repayments. If your LVR is over 80%, you might need to pay the Lender’s Mortgage Insurance (LMI) or have a family member act as a guarantor to reduce the risk.

How to Calculate LVR

Calculating LVR is simple. Divide your loan amount by the property’s appraised value and multiply by 100 to get a percentage.

Exclusions in LVR Calculation When calculating LVR, don’t include any upfront charges. Exclude conveyance, stamp duty, and other out-of-pocket expenses from your calculation.

Practical Example of Calculating LVR

Suppose you buy a house for $500,000, and you’ve saved $100,000 for the deposit. You plan to borrow $400,000. Dividing $400,000 by $500,000 and multiplying by 100 gives you an LVR of 80%.

In math terms: LVR=($400,000 loan$500,000 property value)×100=80%LVR=($500,000 property value$400,000 loan​)×100=80%

Your LVR will change depending on your deposit. A $150,000 deposit results in a 70% LVR, while a $50,000 deposit results in a 90% LVR.

Is Borrowing Above or Below 80% LVR Important?

The 80% LVR mark is crucial. Whether your LVR is higher or lower impacts your borrowing conditions and risks.

Borrowing Up to 80% LVR

Borrowing up to 80% LVR usually means better rates since the lender takes less risk. You won’t need to pay Lender’s Mortgage Insurance (LMI) and the process is generally simpler, often requiring just a desktop appraisal.

Borrowing Over 80% LVR

If your LVR exceeds 80%, many lenders require LMI due to the increased risk. LMI is a one-time insurance premium added to your loan balance. Higher LVRs also often mean higher interest rates and more stringent valuation processes.

LMI Waivers

Sometimes LMI can be waived, such as through government schemes like Home Guarantee Schemes, or if you have a specific profession or qualifications.

Handling Lower-than-Expected Valuations If a lender’s valuation is lower than expected, you might need to increase your deposit or borrow at a higher LVR. For example, if a house valued at $500,000 is appraised at $450,000, the lender may only offer 80% of the lower value ($360,000), requiring a larger deposit.

Benefits of Paying LMI In some situations, paying LMI might be beneficial, especially if it allows you to buy a home sooner rather than waiting years to save a larger deposit.

Reducing Your LVR You can lower your LVR by increasing your deposit or having a guarantor. A guarantor uses their home equity to secure your repayments, potentially eliminating the need for LMI.

Ready to Buy?

If you’re ready to purchase a property but unsure which loan is best for you, explore our articles or schedule a discovery call at 1300 GET LOAN.