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What is loan-to-value ratio (LVR)

What is loan-to-value ratio (LVR)

  January 19, 2021

What is loan-to-value ratio (LVR)

What is the LVR on a home loan?

The term ‘LVR’ refers to a calculation lenders use to express the size of your home loan as a percentage of the property you’re buying.

How is your loan-to-value ratio calculated?

When you apply for a home loan, we will organise an independent valuation of the property that you’re buying. The LVR is then calculated on your home loan by dividing the loan amount by this valuation. For example, if you apply for a loan of $400,000 from the bank to purchase a house which is valued at $500,000, the LVR would be 80%.

The difference between the size of your home loan and the value of the property you’re buying is typically made up of your home deposit. If the borrower were to increase the size of the deposit, this would lower the LVR on the same loan on the same property.

How does your LVR affect how much you can borrow?

The LVR on a proposed loan is one of the factors that helps your lender assess your capacity to pay back the loan you’re applying for. Most lenders have a maximum LVR they’ll approve on their home loans. This protects the borrowers against risk of getting into financial hardship and protects the banks from the risk of a borrower defaulting on their loan.

Do you need to pay for Lenders Mortgage Insurance (LMI)?

LVR is linked closely to another term that’s commonly mentioned when applying for a home loan – LMI, or Lenders Mortgage Insurance. This is the insurance that protects the lender if you default on your home loan repayments.

Having an LVR of 80% or less may help you avoid having to pay for LMI, which could have a big impact on your regular home loan repayments.

How could your LVR affect the cost of your loan?

As well as its potential impact on whether you need to pay for LMI, your LVR will generally dictate which loans you are eligible for, and the interest rate that will be attached to those loans. Some financial institutions offer different interest rates on the same home loan, in line with a range of different LVRs. Other institutions simply exclude borrowers with high LVRs from being able to apply for certain loans. This is where working with an MC Mortgage Solutions Broker can guide you to the best institutions for your particular situation.

 

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