High LVR or low LVR: Things you should consider before applying for a home loan

Your LVR plays a huge role in your ability to secure a home loan. So, if you’re looking to buy a home, here are a few key factors relating to LVR to consider before applying for a mortgage.

What is LVR?

LVR, short for loan-to-value ratio, refers to the amount of money borrowed in proportion to the property's value. It’s typically represented as a percentage figure.

Calculating your LVR is simple. Just plug your figures into the following formula:

LVR = (Loan amount / Property valuation) x 100

Let’s say a property is valued at $500,000 and you’ve saved a deposit of $100,000. If you need to borrow $400,000, you would calculate your LVR as follows:

LVR = ($400,000 / $500,000) x 100

In this case, your LVR would be 80%.

When it comes to applying for a home loan or refinancing, your LVR plays a huge role in your eligibility for a mortgage. It’s one of the main factors lenders consider when assessing your eligibility for a loan. Generally, most lenders like to see an LVR of 80%, which means you’ll need to save a deposit of 20% or more. The lower your LVR, the better your chance of securing a home loan.

While some lenders will still approve you for a loan if your LVR is higher than 80%, you’re often considered higher risk. In these instances, lenders will charge additional premiums, like lenders mortgage insurance (LMI) or a low deposit premium (LDP) to protect themselves in the event you’re not able to keep up with your mortgage repayments.

What is a high LVR loan?

A high loan to value ratio (LVR) loan refers to a mortgage where the borrower relies on finance for a large percentage of the property’s value. Typically, a loan is considered high LVR when it exceeds 80%. This means the borrower has a deposit that’s less than 20% of the property’s purchase price.

With high LVR home loans come a few key factors to consider before applying for a mortgage:

• Increased risk for lenders: High LVR loans are riskier for lenders because they represent a higher loan amount relative to the property's value. If the borrower defaults, the lender could face greater losses if the property value declines.
• Lenders mortgage insurance or low deposit premium: Most lenders require borrowers with a high LVR to pay LMI. This insurance protects the lender if the borrower defaults on the loan. LMI can be a significant additional cost. It can be added to the loan or paid upfront, provided you have the funds.
• Higher interest rates: Lenders often charge higher interest rates on high LVR loans to compensate for the increased risk. With this in mind, borrowers with high LVRs may have fewer options for competitive rates.
• Stricter lending criteria: Borrowers seeking high LVR loans could face stricter lending criteria, including more rigorous assessments of their income, expenses, credit history and overall financial situation.
• Property market conditions: In a declining property market, lenders may be more cautious about approving high LVR loans due to the increased risk of the property's value dropping below the loan amount (negative equity).

While high LVR loans enable buyers to enter the property market with a smaller deposit, they come with higher costs and risks. With this in mind, it’s essential to carefully consider these factors and explore different ways to reduce your LVR, like saving for a larger deposit or looking for more affordable properties.

What is a low LVR loan?

A low LVR typically refers to a mortgage where the loan amount is a small percentage of the property's value. Generally, an LVR below 80% is considered low, with ratios of 60% or lower being even more favourable.

There are several key advantages to having a low LVR loan, including:

• Lower risk for lenders: Low LVR loans are less risky for lenders because they represent a smaller loan amount relative to the property's value. This reduces the lender's exposure in case the borrower defaults.
• Better interest rates: Borrowers with low LVRs often qualify for lower interest rates. Lenders are more willing to offer competitive rates to low-risk borrowers.
• Higher home equity: A low LVR indicates higher equity in the property, which can be beneficial if you need to refinance or take out a home equity loan in the future.
• Easier approval process: Borrowers with low LVRs may find it easier to get loan approval, as lenders view them as low risk. As a result, the approval process may be quicker and less stringent.
• Better loan terms and features: Lenders may offer more favourable loan terms and access to more features, like lower fees, flexible repayment options and redraw facilities, to borrowers with low LVRs.

Achieving a low LVR typically requires a larger deposit or down payment, which means more upfront savings. While this can be challenging, the long-term financial benefits can make it worthwhile.

How does LVR impact your home loan?

There’s no denying that high and low LVRs can significantly influence your mortgage. That said, there are a few other key factors to keep in mind before you submit your loan application:

• Impact on interest rates: Your LVR may impact the interest rates that a potential lender offers you. In many cases, the higher your LVR, the higher the interest rates. Ultimately, lenders will charge higher rates to borrowers with higher LVRs because they perceive them as higher risk.
• Higher mortgage repayments: With higher interest rates come higher mortgage repayments. Especially if you have to pay LMI or LDP on top of your loan.
• Financial scrutiny: When it comes to assessing your serviceability, lenders want to make sure you’ll be able to afford to repay your mortgage. Lenders assess your ability to repay the loan based on your income, expenses and credit history. Higher LVRs might attract more stringent assessments to ensure you can manage repayments comfortably.
• Borrowing capacity: Your LVR has the potential to impact your borrowing capacity. With a larger deposit, you can often afford to take out a larger loan. On the flip side, a smaller deposit can limit your borrowing power.
• Property valuation: As part of the loan application process, the lender will often complete a valuation of the property to determine its current market value, which affects the LVR calculation. Sometimes, the valuation may differ from your purchase price or expectations.

If your LVR isn’t quite up to scratch, read our article on 5 tips to lower your LVR. Otherwise, if you’re ready to buy a home, check out an Unloan home loan and see how it could work for you.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.