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LVR is an acronym for Loan to Value Ratio; it’s financial jargon and a crucial concept to understand if you'd like to get a loan.
LVR shows how much you want to borrow in relation to the market value of your property. In this article we explain:
There are several reasons why it's important to know your LVR.
Lenders will usually have a maximum LVR that they are prepared to approve for loan applications. Different lenders will have different maximum LVRs. If saving for a larger deposit takes time (years for example) you may consider going with a lender that’ll approve a higher LVR so can get you into the market sooner to benefit from capital growth. Our finance specialists can talk you through all your options and the pros and cons of each.
It is important to understand is that if you make an unsuccessful loan application with a lender (due to your LVR being too high), it can damage your credit score, making it harder to get finance on the best possible terms and conditions.
Some lenders may be prepared to let you borrow up to 100% of your property's value (i.e. an LVR of 100%), while others may only lend up to 80% of a property's value.
Another way to get into the market with a lesser deposit is by taking advantage of family pledge or family guarantee. In this scenario you utilise a family member's home as security for your home loan. This can be a helpful option for first home buyers – or investors - to get into the market.
LMI protects the lender if you default on your loan repayments. Lenders will require you to pay for LMI if your LVR is greater than 80% (in other words, if you want to borrow more than 80% of your property's value), unless you are eligible for the federal government's First Home Guarantee.
If you do need to pay for LMI, the cost will depend on how much you want to borrow and your actual LVR. The more you want to borrow and the higher your LVR, the higher the cost of LMI. This cost can be added on to your loan, but if it is, you will pay interest on it.
The lower your LVR, the lower the interest rate you may be able to get. That's because lenders view loans with higher LVRs as being higher risk, so they charge higher interest rates accordingly.
Having a high LVR means you are taking out a larger loan, usually at higher interest rates. This makes you more exposed to rising interest rates in the future.
Calculating your LVR is a simple 3-step process.
A lower interest rate is always attractive as it makes your repayments more affordable and helps you to pay off your loan faster.
Suppose you want to buy a property worth $900,000 and you have a deposit of $225,000. Your LVR would be calculated as follows.
$900,000 less $225,000 = $675,000(your borrowing amount).
$675,000 divided by $900,000 =0.75
0.75 multiplied by100 = 75%. This is your LVR.
The two main ways to reduce your LVR are:
This obviously reduces the amount that you need to borrow.
It's important to understand that you can use the equity you have in your own residential home to help you with your investment property loan deposit. Your equity is the difference between the current value of your property and the amount owing on it.
For example, if the home you live in is currently worth $1 million and you owe $600,000 on your mortgage, then you have $400,000 worth of equity in your home that you can potentially use for an investment property loan deposit.
You can do this by choosing a cheaper property. If purchasing an investment, DPN has a large selection of property options in different high-growth regions at a range of price points.
At DPN, our mortgage broker and team of finance specialists will help you calculate your LVR, look at ways to reduce it and get the most competitive and suitable finance for your situation. We will work with you to understand your goals, look at where you are today and help find you the best home or investment loan that suits your needs today and tomorrow.
We were proudly recognised as a Mortgage Professional Australia Top Brokerage for 2023 for our work helping Australians with competitive finance solutions.
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