LVR stands for Loan to Value Ratio and is the proportion of money you borrow for a home loan compared to the value of the property. It is used to assess the ‘risk factor’ of you as a borrower and lenders will calculate your LVR before deciding whether to approve you for a home loan or not. The higher your LVR is, the more of a risk you may be to your lender.
When calculating your LVR, will look at the property’s value and your deposit to determine how much you can borrow. The lender will then divide the property’s value by the deposit you have saved to calculate your home loan amount.
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 and this would be an LVR of 75%.
Be wary of high LVR
A LVR of 80% or lower is the best place to be as a borrower. Home loans which are over 80% LVR are considered riskier. 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 higher a 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 down the track? There is a real possibility that interest rates will go up within the next year, so would you be able to handle the repayments if they increased? Through your research, you may find that it would be more worthwhile saving for a larger deposit now and waiting and extra couple of months before buying.
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 a guarantor 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 then it is up to the guarantor to repay the money and, if the guarantor cannot do so, the default could appear on the guarantor’s credit report.
A 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.
Anouska Linz is Manager, Online Sales at State Custodians and has over 10 years’ experience in financial services, both in broking and banking. Holding a bachelors degree in accounting, Anouska quickly discovered a love for mortgage lending and assisting people to achieve their home ownership goals. She leads a team of highly experienced lending specialists who are passionate about finding lending solutions which result in real wins for the customer. She is also a massive netball fan.
For more information on our home loans, visit www.statecustodians.com.au or call 13 72 62.