The Loan to Value Ratio (LVR) is a critical factor that lenders consider when evaluating your home loan application. This ratio expresses the amount you need to borrow as a percentage of the property’s appraised value or purchase price. Essentially, it represents the level of risk associated with your loan, influencing your borrowing capacity and the terms of your mortgage. In this comprehensive guide, we’ll unravel the intricacies of LVR, its implications, and strategies to optimise it to your advantage.
What is the Loan to Value Ratio (LVR)?
The Loan to Value Ratio (LVR) is a metric used by lenders to assess the risk involved in granting you a home loan. It’s calculated by dividing the loan amount you’re seeking by the property’s appraised value or purchase price, expressed as a percentage. For instance, if you’re purchasing a property valued at $500,000 and require a $400,000 loan, your LVR would be:
($400,000 ÷ $500,000) x 100 = 80%
This means you’re borrowing 80% of the property’s value, while your deposit accounts for the remaining 20%.
Why is LVR Crucial for Lenders?
Lenders place significant emphasis on LVR because it directly correlates with the level of risk they assume when approving your home loan. A lower LVR generally translates to a lower risk for the lender, as you have a more substantial financial stake in the property. Conversely, a higher LVR indicates a higher risk, as you have less equity invested, making it more challenging to recoup their losses in the event of a default.
The 80% LVR Threshold
In the lending industry, an LVR of 80% is widely regarded as the pivotal point. When your LVR exceeds this threshold, lenders typically view your loan as higher risk, potentially leading to additional costs or stricter lending criteria. One such cost is Lenders Mortgage Insurance (LMI), which protects the lender against potential losses if you default on your loan repayments.
It’s important to note that while LMI safeguards the lender, it does not provide any protection for you as the borrower. The insurance premium is typically added to your loan amount, increasing your overall borrowing costs.
Factors Influencing LVR Assessment
Lenders consider several factors when assessing your LVR and determining the appropriate loan terms. These include:
- Property Location: Some lenders may impose stricter LVR limits for properties located in areas deemed higher risk or with less active property markets.
- Credit History: Your credit score and history play a crucial role in the lender’s risk assessment, potentially affecting the maximum LVR they’re willing to approve.
- Income and Employment Stability: Lenders evaluate your ability to service the loan by considering your income, employment history, and overall financial situation.
- Loan Type: Different loan products, such as variable or fixed-rate mortgages, may have varying LVR requirements.
Benefits of a Lower LVR
While a higher LVR may allow you to purchase a property sooner with a smaller deposit, maintaining a lower LVR offers several advantages:
- Avoid Lenders Mortgage Insurance (LMI): By keeping your LVR below 80%, you can typically avoid the additional cost of LMI, potentially saving thousands of pounds.
- Lower Interest Rates: Lenders often offer more favourable interest rates to borrowers with lower LVRs, as they pose a lower risk.
- Greater Equity: A lower LVR means you have more equity in your property from the outset, providing a financial buffer and potentially enabling you to access equity loans or refinancing options in the future.
- Increased Borrowing Power: With a lower LVR, lenders may be willing to extend higher loan amounts, giving you more flexibility when purchasing a property.
Strategies to Lower Your LVR
If your current LVR is higher than desired, there are several strategies you can employ to lower it:
- Save a Larger Deposit: The simplest approach is to save a more substantial deposit, reducing the amount you need to borrow and, consequently, your LVR.
- Negotiate Property Value: In some cases, you may be able to negotiate with lenders to reassess the property’s value if market conditions have improved since your initial application.
- Consider a Lower-Priced Property: Exploring properties with a lower purchase price can help you maintain a lower LVR while still meeting your housing needs.
- Seek Family Assistance: If available, you could enlist the support of family members who can act as guarantors or provide a portion of the deposit, effectively reducing your LVR.
- Improve Your Credit Score: By addressing any credit issues and improving your credit score, you may be able to qualify for a higher LVR with some lenders.
Understanding Property Valuations
When calculating your LVR, lenders typically rely on their own property valuations rather than the advertised purchase price. These valuations are conducted by professional valuers hired by the lender and assess the property’s “quick-sale” value, taking into account factors that protect the lender’s interests.
If the lender’s valuation differs from the market valuation provided by real estate agents, the lender will generally use the lower value to calculate your LVR, potentially affecting your borrowing capacity.
Upfront Costs and LVR Calculations
It’s crucial to understand that upfront costs associated with purchasing a property, such as conveyancing fees and stamp duty, are not included in the loan amount when calculating your LVR. These expenses must be accounted for separately, as they can impact the size of your deposit and, consequently, your LVR.
Government Assistance Programs
For first-time homebuyers or those with limited resources, various government assistance programs may be available to help you secure a home loan with a lower deposit. One such program is the Home Guarantee Scheme, which allows eligible individuals to purchase a property with a deposit as low as 5%.
It’s essential to research and explore these options, as they can significantly impact your LVR and overall borrowing capacity.
Ongoing LVR Monitoring
Even after securing your home loan, it’s advisable to monitor your LVR regularly. As property values fluctuate over time, your LVR may change, potentially affecting your eligibility for refinancing or accessing additional equity. Lenders typically reassess your LVR periodically, and maintaining a favourable ratio can open up more financial opportunities in the future.
Seeking Professional Advice
Given the complexities and potential financial implications of LVR, it’s highly recommended to seek guidance from experienced mortgage brokers (like BE Astute) or financial advisors. They can provide tailored advice based on your unique circumstances, helping you navigate the lending landscape and make informed decisions that align with your long-term financial goals.
In Conclusion…
The Loan to Value Ratio (LVR) is a critical metric that lenders use to evaluate the risk associated with your home loan application. By understanding its calculation, implications, and strategies to optimise it, you can position yourself for a more favourable borrowing experience. Remember, a lower LVR not only increases your chances of loan approval but also offers potential benefits such as lower interest rates, avoidance of Lenders Mortgage Insurance, and greater borrowing power. Seek professional guidance, explore government assistance programs, and implement strategies to lower your LVR for a seamless and financially advantageous home-buying journey.
BE Astute are here to support!
Ready to optimise your Loan to Value Ratio (LVR) and secure the best possible mortgage terms? At BE Astute, we specialise in guiding you through every aspect of the home loan process. Whether you’re looking to maximise your borrowing capacity or simply want to understand how LVR affects your mortgage, our expert team is here to help.
Contact us today to get personalised advice and support tailored to your unique financial situation. Let’s work together to make your home loan experience smooth and advantageous.
