If you are looking to take out a home loan, you need to know what lenders consider a risky Loan to Value Ratio and how it can affect your borrowing power.
So, what is a good LVR in Australia and why does it matter?
Read on to find out.
What Is LVR?
LVR is the total amount of resources you need to borrow to buy a property. It is calculated as a percentage of the property’s value.
For instance, if you want to buy a home priced at $500,000 and you have a $100,000 deposit, you would need to borrow $400,000. The LVR would be 80% (i.e. 400,000 divided by 500,000 times 100).
The bigger the deposit, the lower the LVR. Keep in mind that this is a simplified example that does not include additional costs associated with your purchase, such as stamp duty and the services of a conveyancer. Still, it should give you a clear idea of what an LVR is and how it is calculated.
Note: You can always use an LVR home loan calculator to get the most accurate results.
What Is a Good LVR?
Anything below 80% is considered a good LVR.
A lower LVR benefits the borrower as it allows you to take out a smaller loan from the bank. It also means you will get a more favourable interest rate than borrowers with high LVR, thereby reducing the amount you need to repay.
Finally, a lower LVR increases the equity you hold in your home which you can later use to buy another property without putting down a deposit or invest in the stock market.
On the downside, you will have to come up with a larger downpayment.
- Related reading:
- How to save for a deposit while renting
- How to save on a home loan
- What is a gifted deposit
What Is the Maximum LVR Ratio That I Can Borrow?
Banks use your LVR to calculate how much you can borrow. To lenders, who need to make sure that the borrower will be able to repay the debt, a lower LVR carries less risk.
That’s why many mortgage providers have a maximum LVR for which borrowers need to qualify in order to get approved for a home loan. Some accept a maximum LVR of 80%, while others require an LVR of 60%. In Australia, the average low-doc mortgage comes with a 60% LVR, which means you will have to make a 40% deposit to be able to qualify.
So, if you want to purchase a property valued at $400,000 and the lender requires a maximum LVR of 80%, you’ll need to leave a deposit of at least $80,000 to qualify for the loan. But if the maximum LVR is 60%, you’ll need a deposit of $160,000
If you are a strong applicant you could even get a 90% to 95% LVR.
The maximum LVR you can borrow depends on several factors, including where your property is located, your credit rating, your income and employment history, the type of loan you are applying for, and the amount you want to borrow.
Each lender has their own criteria when it comes to determining the maximum LVR.
For instance, high-risk borrowers, such as someone with a default in their credit file might not be able to borrow more than a 70 or 80% LVR ratio. The same is true for buyers of homes that could be difficult to sell, such as houses built with unusual materials, heritage listed property or homes in remote locations.
Note: Low-doc applicants can typically borrow up to 60% or even 80% if they are in a strong financial position.
What Is a Risky LVR?
If your LVR exceeds 80%, lenders see you as a high-risk client.
In this case, mortgage applicants might ask you to pay Lenders Mortgage Insurance to offset some of the risk involved. LMI protects the lender in case the borrower defaults on the loan or the sale of the property cannot cover the capital borrowed.
Alternatively, you could try and get a friend or family member to act as a guarantor for your loan, although not all mortgage providers will accept this option.
Note: High-risk borrowers need to carefully discuss their options with a mortgage broker.
What Is the Difference Between Bank and Market Valuation?
The bank valuation of the property is how much the mortgage provider can recover from the sale if the borrower defaults on the loan. The market value, on the other hand, is an estimate of the sale price.
While the first is carried out by a professional valuer, the latter is an estimation of the real estate agent (based on recent sales of similar properties in the area) or the seller’s assumption of how much money the property is worth.
Home buyers might be interested in:
Can I use my super to buy a house
What are the hidden costs when buying a property
Sometimes the purchase price, i.e. the market value, of the property is not the same as the bank valuation.
In this case, lenders tend to use the lower of the two amounts to calculate the LVR.
In general though, unless you are applying for loans higher than $800,000, have no/partial evidence regarding your income or the property is located outside of a capital city or major regional centre, the bank will accept the price on the Contract of Sale to determine your LVR.
Bottom Line
Understanding how LVR is calculated and what it means for the amount you can borrow from a bank is a must when applying for a home loan. A good LVR can get you better interest rates and a smaller loan, as well as increase your equity in the home. On other hand, an LVR over 80% may incur higher costs, such as LMI and more expensive conveyancing fees.
To be on the safe side, always use an LVR calculator before applying for a mortgage—this way you will have a rough idea of how much the bank is willing to lend you.
FAQs:
1. What does 60% LVR mean?
A 60% LVR means that you can only borrow 60% of the total property value. It also means that you will need to provide a deposit of 40% to qualify for a home loan. So if the property you are interested in is priced at $500,000 and your maximum LVR is 60%, you will need to put up a deposit of $200,000.
2. Is it better to have a high or low LVR?
The lower the LVR the better. If your LVR is low you pose less of a risk to lenders and they will be able to offer competitive interest rates on your home loan.
3. What is an acceptable LVR?
Most lenders will let you borrow at an 80% LVR. This means that lenders take on less risk with you, so naturally, you’ll have lower interest rates and payment instalments. Anything over 80% is considered a high-risk deal.
4. What is a good LVR for refinancing?
Only a few lenders are willing to approve refinancing for a mortgage with an LVR between 80% and 90%. Even if your application is approved, you may have to pay LMI again. That’s one more reason why you should make regular mortgage payments—you will lower the amount owed and be able to get a better refinancing deal.
