So, what is a good LVR? Lenders typically watch out for their best interests, which is reflected in the LVR that you’ll get. That’s why knowing your options and how they translate to your finances is essential.
Keep reading our comprehensive guide to learn everything you need about Loan-to-Value Ratio, from how to calculate it to which one might be the best.
What Is a Loan-to-Value Ratio?
Loan-to-Value Ratio or LVR is the total amount of resources that you need to borrow to buy a property of choice. LVR is calculated as a percentage of the property’s value and is used as a security for the loan. Naturally, the lower your Loan-to-Value Ratio, the higher the chances of getting approved for low-interest rates, since a low LVR presents a lesser risk to the lender.
How To Calculate Your Loan to Value Ratio?
The Loan-to-Value Ratio can either be calculated using an LVR home loan calculator or by dividing the amount you need to borrow by the property’s appraised value. For example, if you are looking at a property appraised at $500,000 and you have a $99,000 deposit, you’ll need to borrow $410,000. Once the LVR is calculated, it will amount to 80%.
What Is a Good LVR?
Anything below 80% is a good Loan-to-Value Ratio. To get to an LVR of 80%, borrowers need to present a 20% deposit to get a reasonable interest rate.
As said, many lenders require an LVR of at least 80% or lower to get a competitive home loan rate. As it is in the lender’s best interest, the lower the LVR percentage, the better the interest rate.
How Does Your LVR Affect How Much You Can Borrow?
Typically, lenders grant loans they are sure the borrower will be able to repay. LVR protects the lender from the borrower defaulting on the loan but also protects the borrower from going into bankruptcy.
That’s why many lenders have a maximum LVR for which borrowers need to qualify in order to get approved for a home loan. Some require a maximum LVR of 80%, while others require an LVR of 60%.
If, per se, the loan has a maximum LVR of 70% on a property valued at $400,000, the maximum amount the lender would let you borrow would be $280,000. Once again, if you have a larger deposit than what would be $120,000 in this case, you’ll still qualify for that loan, but you will have a lower LVR, which means you’ll end up borrowing less than the maximum lender’s amount.
What Is a Risky LVR?
If your LVR exceeds 80%, lenders see you as a high-risk client. Nevertheless, there are some precautions you can take to get yourself approved for a home loan with a risky LVR.
In case of a high LVR, lenders require you to pay something called Lenders Mortgage Insurance (LMI) to negate the risk. LMI protects the lender in case the borrower defaults on the monthly instalment or cannot meet the required payments.
A word of advice – if you are unsure about the high fees you’ll be required to pay, it’s best to hold off on your dream house for a while, at least until you’ve saved enough money to make a larger deposit.
What Is the Difference Between Bank and Market Valuation?
The most notable difference between a bank and a market estimate is that lenders or banks perform a completely independent valuation, as opposed to real estate agents.
If a real estate agent were to appraise your home, they would give you a market value of what the property is worth, depending on the current market conditions.
When determining LVR, banks usually do a bank valuation to ensure they don’t lend more than the property is worth. Banks or lenders want to know the property’s estimated value so as to be able to reclaim the lost value if they need to sell the property in case the borrower defaults on the mortgage payments.
How Can Your LVR Affect Your Deposit?
Since LVR significantly affects your deposit, you need to carefully consider the maximum LVR the lender requires to know how much to deposit. Thus, failure to meet the conditions determined by the lender will result in you being unqualified for the home loan in question.
For instance, 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% on the same valued property, you’ll need a deposit of $160,000 at the very least.
If you are unsure how much to deposit, use an LVR ratio calculator and see the Loan-to-Value Ratio percentage you’ll get if you deposit the desired amount. If it matches the lender’s maximum LVR, you have nothing to worry about.
Understanding the notion of a Loan-to-Value Ratio before meeting a lender is essential. This is because getting a good deal and acceptable interest rates can greatly be impacted by the LVR options your lender has to offer. That’s why thorough research is necessary and can make all the difference in your financial situation.
1.What does 60% LVR mean?
A 60% LVR entails that you only need to borrow 60% of the total property value. This means that lenders take on less risk with you, so naturally, you’ll have lower interest rates and payment instalments.
2.Is it better to have a high or low LVR?
It’s always better to have a low LVR (lower than 80%) as you’ll have a head start and more equity in your home. Additionally, the lender will offer better interest rates, which can significantly help you in the long run.
3.What is an acceptable LVR?
So what is a good LVR? Lenders consider any LVR of 80% or lower as an acceptable LVR. Anything higher than 80% is considered a high-risk deal.