- If you're looking to buy a house then you'll need to be aware of your LVR.
- All you need to know about LVR.
- How the loan-to-value ratio can affect how much you can borrow.
An important consideration is your LVR, or loan-to-value ratio. This ratio will impact your capacity to borrow enough money for a property, your ability toavoid LMI and pay down your loan faster.
We will explain what LVR is, how it is calculated, what makes a good LVR and why it matters. Let's dive in.
In this guide
What is the Loan-to-Value-Ratio?
The Loan-to-Value Ratio (LVR) (also known as LTV) is the amount of money you are seeking to borrow compared against the value of the home you want to buy.
It is calculated as a percentage and is a key figure lenders consider when they are working out how much money they are willing to lend you.
Generally, the lower your LVR, the better.
How LVR is calculated
Your LVR is calculated as a percentage, with lenders taking into account two key factors:
- How much you want to borrow
- The value of the home you want to buy
Let’s say you have your eye on a house that’s selling for $1 million and you have saved a deposit of $250,000.
To buy the house, you will need a home loan of $750,000.
To calculate the LVR, your lender will divide the value of the loan you need ($750,000) by the value of the property ($1m).
The result (0.75) is then multiplied by 100 to get the LVR, which in this case is 75 per cent.
To take another example, again with a house selling for $1 million - if you had a deposit of $100,000 and sought a loan of $900,000, your lender would divide $900,000 into $1m to get an LVR of 90 per cent.
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Do you use purchase or valuation price?
Lenders usually use valuation price, and it’s important to remember this can be different from the purchase price.
A lender will make their own valuation of the home you are seeking to buy to help determine the LVR and decide whether or not they will lend you the money you want.
The lender wants to make sure that if you default on your loan and they have to sell your home, the value of the property is at least enough to recoup the loan funds.
The valuation takes into account a number of factors, including the condition of the property and a comparison of sales of similar properties in the area over say, the past six months.
There are four main methods lenders will use to have your home valued:
- Automated Valuation Model (AVM). A completely automated process where a computer program uses data, including comparable sales to reach a conclusion on the value of the property.
- Desktop valuation. A valuer will be given information about the property, including photographs, and use a computer program to help him or her make comparisons against other sales to reach a valuation.
- Kerbside valuation. - A valuer makes an external inspection of the house from the street.
- Full valuation. This is where a valuer makes a full physical external and internal examination of the property to determine its value.
Lenders will often use one of the first three types of valuation for loans with an LVR up to 80 per cent, while for loans with a higher LVR they are more likely to conduct a full valuation.
If the valuation price differs from the sales price, the lender will use the lower of the two figures.
This can cause problems if the purchase price is greater than the lender’s valuation of the home.
You will then be in the position of trying to remedy the situation. You can:
- Try to make up the shortfall in funds, perhaps through a personal loan or from borrowing from a friend of family member;
- Request a new valuation from a different valuer;
- Dispute the valuation.
This situation can be a particular issue in off-the-plan purchases, where if the time the property is built and the lender makes their valuation, the valuation is less than the purchase price.
When refinancing a loan for a property you already own
If you are refinancing a loan, the value of your property is likely to have changed from when you bought it. For this reason, the lender will conduct their own valuation on the property to determine the LVR.
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What LVR is too high or too risky?
If your LVR is greater than 80 per cent, most lenders will consider this high risk.
You will be required to take out Lender’s Mortgage Insurance (LMI), a premium which is added to the cost of your loan.
This reduces the lender’s risk and makes them more likely to offer you the loan.
What is good LVR?
Any figure of 80 per cent and less. The more of your own money you are putting into your property purchase the less the lender has to shell out, meaning their risk is reduced. If you have an LVR of 80 per cent or less, you won’t have to take out LMI.
LVR for investment loans
Some lenders will offer investment loans at 95% LVR. You will need to take out LMI and will need to be in a strong financial position, with a least 5 % in genuine savings. More common are investment loans at 90% LVR. You will still need LMI.
LVR for construction loans
The rules around LVR tend to be more relaxed for construction loans, with most lenders only requiring a 5 per cent deposit. This means the LVR for construction loans can be up to 95 per cent.
Why your LVR matters
It affects the value of the house you can afford
Your LVR is important because it can determine how much you can borrow and therefore your options when it comes to buying a house.
The higher your LVR, the less likely your lender will be willing to provide the size of loan you are seeking.
Obviously, the reverse is true if you have a low LVR.
You will incur the additional cost of LMI if your LVR is over 80%
As mentioned above, if your LVR is higher than 80 per cent, your lender will require you to take out Lender’s Mortgage Insurance, which is calculated based on your LVR and the amount you are borrowing.
This one-off cost is added to your mortgage and will include the stamp duty applicable in your state.
Some lenders also charge a LMI premium loading for some customers. For example if you are self-employed or using an investment property for security.