What is LVR?
LVR is a commonly used acronym in the mortgage and property industry, but do you know what it means or how it applies to home purchases?
LVR stands for Loan to Value Ratio. It is the percentage of money you borrow for a home loan compared to the value of the property. It is used to assess your risk factor as a borrower; lenders will calculate your LVR before deciding whether or to approve you for a home loan. The higher your LVR is, the more of a risk you may be to your lender.
When calculating your LVR, a lender will look at the property’s value and your deposit to determine how much you will need to borrow. The lender will subtract your deposit from the purchase price and then divide the remaining amount by the property value.
For example, if you wish to purchase a $400,000 property and have a $100,000 deposit saved, you will need to borrow $300,000. Being three-quarters of the home’s price, this would be an LVR of 75%.
Be wary of a high LVR
An LVR of 80% or lower is the best place to be as a borrower. Home loans which are over 80% LVR are considered high risk. As a result, most lenders will charge extra fees, such as Lender’s Mortgage Insurance (LMI), in order to protect themselves in case you default.
Another risk of a higher LVR is that you will have larger home loan repayments. You may find that you can manage the repayments at the moment, but what about in 6 months? What about a year from now? There is a distinct possibility that interest rates will rise; if so, would you still be able to handle the repayments? During your pre-purchase research, you may find that it would be more worthwhile saving for a larger deposit now, waiting an extra few months before buying and securing yourself a lower LTV.
One option to help reduce your loan to value ratio is to use a guarantor. A guarantor can offer the equity saved in their property as a security for the home loan. (Many parents often become guarantors for their kids to help them purchase their first home.) However, it does not come without risks. If the borrower is unable to meet repayments, it is up to the guarantor to repay the money. Most importantly, if the guarantor cannot continue to meet the demands of repayment, the default could appear on the guarantor’s credit report.
LVR plays an important part in the assessment of a home loan application, so the more you know and understand about how it is calculated, the better chance you will have at finding the right home loan for you.