LVR or Loan to Value Ratio is a simple percentage that helps lenders assess how much risk you pose to them in case they decide to lend to you.
Simply speaking, LVR is the ratio of your home loan amount to the total value of the property you intend to purchase. 80% LVR is the golden figure in the mortgage industry and anything upwards can cost you dearly.
How is LVR calculated?
While calculating your LVR, you need two important figures – the Big D or the amount of deposit you have saved up and the value of the property you intend to buy.
By subtracting the deposit amount from the property value, you would get the amount of loan you need. Divide this loan amount with the property value, and voila, you have your LVR.
For example, Lily wants to purchase a house worth $400,000. She has saved up a deposit of $100,000, which means she needs a home loan of only $300,000. Therefore, her LVR is 75% (300,000 divided by $400,000, expressed as a percentage).
How does LVR affect your home loan – the high and the low
Your LVR is one of the most significant factors affecting your home loan. Lenders take this percentage into account while deciding the destiny of your home loan application.
Higher LVR means you pose higher risk to lenders who may or may not lend to you. Lower the LVR, the lesser you need to borrow and are more likely to have your loan application approved with better home loan rates.
1. Higher the LVR, the warier are the lenders. However, may lenders offer low-doc loans for up to 95% LVR.
2. Borrowers looking for higher LVR loans may also have to pay Lenders Mortgage Insurance (LMI) that can run into thousands of bucks.
3. Higher LVR means more costs – Higher rate of interest, LMI payments as well as more repayments.
Having a loan to value ratio of 80% or saving a deposit of up to 20% (an additional 5% for accessory costs is always a plus) can boost the chances of your home loan approval significantly.
1. For a bigger loan with a low LVR, you can negotiate a good discount with lenders, saving thousands over the life of the loan.
2. Low LVR also means you may get a loan with all the additional features you need at no extra cost, as lenders want to lend to low risk borrowers.
Some tips to ensure a low LVR for your home loan
1. Start Saving– Set your financial targets and start saving for your deposit in advance. Having a larger deposit can get you much better home loan deals and proof of genuine savings can help get your loan application over the line.
2. Have a Budget– Having a budget is a definitive step towards meeting your financial goals. Make a good household budget and save more towards your deposit easily.
3. Use a Guarantor– It is possible to lower your LVR by asking your parents or a third party to guarantee your loan by securing it against the equity in their property. However, make sure you can service the repayments (calculate your repayments) lest you put your family in a precarious financial situation.
4. Compare Loans– Shopping around always pays! Compare home loan rates online to get the most competitive rate in the market. Before you choose a home loan, understand the features, as the cheapest may not always be the best.
5. Ask an Expert- It is always best to choose a loan tailored to your financial condition. Speaking to an expert may help you understand your situation better. Get in touch with verified brokers on HashChing and have your queries answered online, absolutely free of cost.
By Vidhu Bajaj