Your LVR refers to the percentage of the money you plan to borrow against the property’s value. Lenders use this figure to assess the level of risk in lending you money. If the LVR is over 80%, it might be challenging for you to get approved for a home loan, and the risk to the lender will be higher.
How do lenders calculate your LVR?
To assess the risk in lending you money, the lender calculates your loan-to-value ratio by dividing the amount of money you plan to borrow by the value of the property you intend to buy, expressing the result as a percentage.
To calculate your LVR, you need to know the size of your deposit and the value of the property. If for example, you want to buy a property worth $800,000 and you have saved up a deposit of $200,000, you will need to borrow $600,000. Therefore, your LVR would be 75% (600,000 divided by 800,000, and expressed as a percentage).
How does LVR affect your home loan?
Your LVR is one of the most significant factors affecting your home loan. Lenders consider this percentage to decide whether to approve your home loan application. Most lenders require you to provide a minimum 20% deposit to qualify for a home loan. In other words, your LVR should be 80% or less to qualify for a loan.
A higher LVR means you pose a higher risk to lenders who may not lend to you or only approve your application if you agree to pay for Lender’s Mortgage Insurance (LMI).
Your loan-to-value ratio could also impact the interest rates offered to you by lenders. The higher the LVR, the riskier the loan is for the lender, and they may provide you with a higher interest rate to offset that risk. On the other hand, a lower LVR coupled with a good credit score could help you negotiate a better interest rate on your home loan.
Tips to lower your LVR
You need to consider two factors when calculating your LVR – the value of the property you plan to buy and the size of your deposit. As a result, you have two options to reduce your LVR:
- Save a bigger deposit – The more you save, the less you need to borrow. A 20% deposit could also help you save on LMI costs. First-home buyers may check their eligibility for the First Home Owner Grant to boost their deposit size.
- Buy a cheaper property – Buying a property is an emotional moment, but it should not be an emotional decision. Consider a property that aligns with your budget to reduce your LVR as well as your monthly repayments.
Can you qualify for a loan with a high LVR?
Qualifying for a home loan with a high LVR with is possible with some lenders. Generally, you will need to pay for LMI (Lenders Mortgage Insurance) or have somebody go guarantor on your loan.
LMI is a type of insurance that protects the lender if the borrower defaults on the loan. High LVR loans are considered risky and lenders may only agree to lend you money if you pay for LMI. While this might look like a tempting option for entering the property market with a lower deposit, remember that the cost of LMI could run into thousands of dollars, adding considerably to your homebuying costs.
If you have a low deposit and want to avoid LMI costs, you can get a guarantor loan. When you take out a guarantor loan, your parents or another close relative uses the equity in their property to secure your loan.
If you fail to keep up with the repayments, the guarantor may need to pay for you, or their property could be foreclosed in some circumstances. This may also strain the relationship between the parties. Consider speaking to a mortgage broker to learn more about guarantor home loans and low-deposit home loans to evaluate your options.
By Vidhu Bajaj
Hashching Content Writer