In layman’s terms, Loan to Value Ratio (LVR) is the amount you’re borrowing represented as a percentage of the property’s value. Lenders generally gauge a property’s value based on an independent valuation, not the sale price. To value the property, they might conduct an in-person inspection or a drive-by or desktop valuation.
The higher the LVR, the higher the risk for the lender.
How is LVR calculated?
The loan amount is divided by the purchase price of the valuation amount. Then multiplied by 100 to make a percentage.
You would like to borrow $360,000.
The property you are using as security is valued at $450,000.
Therefore $360,000 ÷ 450,000 x 100 = 80% LVR
The bigger your deposit, the lower the loan to value ratio.
For a refinance, how is LVR calculated?
It’s calculated in much the same way – using an independent valuation – because the value of your home may no longer be relevant in today’s market. When refinancing, LVR is used to help lenders work out how much you can borrow.
As a general rule, lenders may allow you to borrow up to 80% of your home’s value. Off this, minus the amount of your outstanding loan. This figure is the property’s potential usable equity. If you don’t have enough equity, it’s not a great idea to refinance. A minimum 5% equity is typically needed to refinance, but closer to 20% equity is the favoured option for many lenders.
What is the maximum LVR?
Lenders set their own limits on how high the LVR can go. Their decision will depend on variables like:
- Loan amount
- Your credit history
- Whether you intend to live in the property
- The type of loan you’re applying for
- Your location. Your lender may have LVR restrictions on specific postcodes they consider high risk.
If you lack the necessary documentation to prove your income and earnings, you may not be able to get a high LVR. However, this will hinge on the strength of your financial position and the variables outlined above.
Full doc applications – where income evidence is provided – can usually borrow up to 80% LVR. If the lender deems you to be in a solid financial position, you may be offered up to 90% or 95%. This is particularly the case if you have a guarantor to support your application.
What is a good LVR?
Most lenders consider home loans for 80% LVR and above to be a risk.
A loan to value ratio under 80% could be considered ‘good’ because you won’t be charged Lenders Mortgage Insurance (LMI).
Most lenders consider home loans for 80% LVR and above to be a risk. So, they charge LMI because it protects the lender in case you default on your loan payments and your property is sold at a loss.
The best way to avoid the LMI expense is to save a deposit of 20% or use another property as joint collateral. If neither option is available, make sure you know precisely how much LMI you will be paying before you go ahead with the loan.
A low LVR may see you eligible for lower interest rates and special home loan features. Whereas a high LVR means you’re borrowing more and will have more home loan interest to pay back over time.
Have another LVR question? Contact your Yellow Brick Road mortgage broker for individual assistance. We can explain the differences in LVR pricing, policy and procedures between lenders and how this affects you.
**The information on this article contains general information and does not take into account your personal objectives, financial situation or needs. If you require further information don’t hesitate to contact the branch directly.