If you’re considering purchasing a property, you might have heard the term Loan-To-Value Ratio (LVR). But what is it, and why does it matter? In this post, we’ll look closer at LVR and why it’s important to consider when buying a home.
Loan-to-Value Ratio: In a Nutshell
Imagine you’re buying a house or any property but don’t have all the money upfront. That’s when loans come into play, and you will encounter the term Loan-to-Value Ratio, or LVR for short, a significant concept you should understand before purchasing a property.
In simple terms, LVR is a percentage that shows you the amount of money you want to borrow compared to the value of the property you’re buying. In addition, it lets you determine precisely how much of the property’s value you intend to finance with a mortgage.
With this fundamental understanding of the Loan-to-Value Ratio, let’s delve into its implications for borrowers and lenders alike.
How to Calculate LVR
To determine your loan-to-value ratio, divide the agreed loan amount by the total property value (appraised value). Multiply the result by 100, leaving you with the LVR percentage!
For instance, when taking up an $800,000 home loan for a $1,000,000 property, divide $800,000 by $1,000,000, and you’ll get 0.8. Multiply that by 100, and you get 80% LVR.
This percentage value shows how much of the property’s total price you are financing with a loan.
Contact us at 1300 030 388 to uncover the best LVR for your home loan needs today!
What if the Valuation and Purchase Price are Different?
When a property’s valuation and purchase price differ, it can impact the LVR calculation and have implications for both borrowers and lenders.
Another example is buying off-the-plan, where the agreed price at the start will differ when the property is fully built. Say you’re planning to buy a unit that’s supposed to cost $300,000 after construction. You then apply for a 90% LVR home loan of $270,000.
But once construction is finished, it’s actually worth more than you expect at $360,000.
Depending on your circumstances and the bank’s policy, some lenders will choose to use the valuation price while others will use the purchase price.
If your lender uses the valuation price, your LVR will drop from 90% to 75% by dividing $270,000 to $360,000 (the valuation price). A lower LVR may qualify you for a lenders’ mortgage insurance (LMI) discount or waiver, typically charged at 85% LVR and higher.
Does My Property Need Valuation?
If you plan to buy a property, getting a valuation will determine where you stand and how much deposit you’ll need to get approval. Some banks (not all) will allow you to skip property valuation if you pass the following criteria:
- The loan amount is less than 1.5mil
- Your loan has 80% LVR or less.
- You can provide complete income documentation.
- A real estate agent with a licence handles the transaction.
- The property is not a new home (off the blueprint board or a brand-new structure).
- Your property is located in a significant regional or capital city.
- You have no ties to the vendor.
Instead, your lender will refer to the price reflected in your Contract of Sale to compute your LVR.
How Does LVR Impact Borrowing Power?
When looking for a mortgage or other types of loans, your borrowing power will largely influence how much LVR you can apply for. Lenders typically view a loan as less risky with lower LVRs than those above a given threshold.
In other words, applying for a lower LVR by providing more deposit can increase your borrowing power. You’re likely to get better rates with a low-LVR home loan because the lower the LVR, the lower the risk is to the bank.
Moreover, applying for a lower LVR shows that you have built up significant equity in the property, which protects the lender from possible losses. As a result, the lender might be more inclined to approve a larger loan amount.
What Is The Maximum LVR That I Can Borrow?
The amount of the house loan you require, the location of your property, your credit history, and the type of loan you are looking for all influence the LVR that the banks will let you borrow.
In general, applicants with complete documentation—including income documentation—can borrow up to a maximum of 95%.
Low-doc applicants (self-employed without proof of income) may borrow up to 60% and even up to 90% LVR, provided their financial situation is adequate.
Can I Borrow 100% LVR?
If you have a high LVR requirement, you can apply for 100% LVR with a guarantor to secure your home loan.
You can also have a friend or family become a guarantor if they own a separate property with enough equity to secure your loan.
By committing a piece of their property as security for the loan, they essentially secure a portion of the mortgage, allowing you to borrow at a higher LVR.
In short, borrowing at 100% LVR is not possible without a guarantor.
Do Banks Limit LVR?
Yes, and for good reason. To control the risk associated with the loan applications they receive, banks and other lending institutions implement LVR limits.
The LVR limit is the maximum percentage of the property’s value they will lend you. These limits are set to manage the lending risk and ensure responsible lending practices.
Lenders limit home loan LVRs to mitigate their exposure to potential losses if borrowers default on their loans.
The higher your LVR is, the higher the risk, as this shows that you have less equity in the property and the more a bank may lose in the event of a loan default.
Because it might be challenging for you to sell the home you’re buying, the lender might also lower your Loan-to-Value Ratio.
If you’re purchasing a property, your LVR will be decreased:
- That is somewhat unique
- In an unknown location
- That is limited by heritage-listed properties, serviced apartments, and display homes
- That may be any of the mentioned above, and selling it would take longer than six months.
Discuss Your Home Loan LVR Options with Mortgage Pros
In the journey toward homeownership, understanding your Loan-to-Value ratio is essential.
Knowing this ratio gives you the power to enter the world of homeownership, knowing what to expect regarding down payments, budgeting, and long-term financial planning.
Remember, the more you know about the LVR ratio, the better you can navigate the intricacies of real estate finance.
Talk to our senior mortgage brokers at 1300 030 388 today or fill out our free assessment form, and let’s uncover the best home loan solutions suited to your needs.