Loan to Value ratio or LVR: why is it so important for your home loan?

Video transcript
The Loan to Value ratio or LVR is a financial term used by lenders. It’s the ratio of the amount lent to the valuation of the property. The LVR is one of the key criteria used by lenders for deciding if they’ll provide you with a loan.

I strongly recommend you get an understanding of your LVR when you prepare for a home loan. There are many online calculators out there but you can also easily calculate it yourself by dividing the money you want to borrow by the valuation of the property. You then simply multiply it by 100.

Let me give you an example. The purchase price of the property you want to buy is $500,000. You need a $400,000 loan from your lender. The LVR is (400,000/500,000)*100%= 80%. The LVR is exactly 80%. This means that 80% of the loan is financed by the bank and you pay the remaining 20%.

LVR-The-Money-Store

Let’s say you have set your eyes on a $450,000 property. You only have a 10% deposit and you’ll need a $405,000 loan. In this case the LVR equals (405,000/450,000)*100%= 90%.

Most lenders require a LVR of less than 80% for standard loans. For the lender, high LVR ratio’s are more risky. Some lenders will accept high LVR’s upto 90 or 95%. The final decision to give you the loan will depend on the location of the property, your credit history and the loan amount amongst other things.

If the LVR is higher than 80% (as in our previous example), the lender will usually require you to pay for Lenders Mortgage Insurance (LMI). The LMI protects the lender in the event you default on your Home Loan.

With the LMI more people are able to get a loan and this is a good thing.

You only pay for the LMI once and it’s included in the loan amount. To calculate the LMI, the lender will usually carry out a valuation of the property. In the event the purchase price is different from the valuation of the lender, the mortgage insurer will use the lower of the two to calculate the LVR.

The amount you pay for the LMI can be quite significant. It usually ranges from 1 to 3% of the loan amount depending on the LVR, the type of loan and your credit history. Please be aware that lenders will charge you differently.

As a mortgage broker, I can compare lenders and check out their mortgage insurance rates as well as their interest rates. This could potentially save you a lot of money.