Understand what the loan to value ratio (LVR) means for you when applying for a home loan. It might just save you money.
When applying for a home loan, you will often here the acronym ‘LVR’ when it comes time to assess your ability to borrow money.
To quickly answer what LVR means; basically it is the size of your loan, compared to the value of your home, expressed as an easy to understand percentage that the banks will use.
Definition of LVR
LVR is an acronym that stands for ‘loan to value ratio’. LVR is calculated by how much of a deposit (equity, or lack of) you have towards your home’s purchase price. Simply divide the value of the property by the amount of the loan.
Example of how to calculate your loan to value ratio (LVR)
You want to purchase a property worth $100,000. You have $20,000 saved for your deposit. The loan you need is $80,000. To calculate the ‘loan to value ratio’ simply divide $80,000 (loan needed) by $100,000 (property value) to receive an LVR of 80%.
The formula for calculating LVR: $ amount of loan needed divided by $ value of potential property
This percentage is used by banks and home loan lenders to understand how much money you have contributed towards the purchase of your home.
Is it better to have a high LVR or low LVR when applying for a home loan?
The lower your LVR percentage, the better off you are (as you have contributed more of a deposit towards the purchase price).
High LVR means you have less money to contribute towards your loan, in turn you are borrowing more money, exposing yourself to more risk, exposing the bank to more risk and in turn receiving less perks than someone with a low LVR.
Ways your LVR will affect your borrowing
If you have a high LVR
- You may get a higher interest rate
- You may not be approved for a home loan
- You may be limited in how much you can borrow
- You may need to pay LMI (lenders mortgage insurance)
What LVR means to home loan lenders
As stated previously, a high LVR or a low LVR can greatly impact your success when it comes to applying for or switching home loans.
To a lender, the lower your LVR the more likely they are to lend. Quite simply, it means you have cash equity in the property and should you default on the remaining money, they have retrievable cash not only from your loan but from the sale of your house.
Quite often home loan lenders will reward lower loan to value ratio’s (LVR) with superior home loan interest rates, terms and perks.
How to lower your LVR
It’s simply. Start saving money and build up some equity either in your existing home loan or inside your savings so that come purchase time, you don’t need to borrow as much money.
Your goal should be to simply boost your home loan deposit.