How a different LVR impacted home buyers' experiences

As a first-time home buyer, you’re probably all too familiar with the amount of time, effort and dedication it takes to save up a 20% deposit. While it can be difficult to scrape together a big enough deposit, the amount you’re able to save towards your first home ultimately impacts your LVR, which is short for loan to value ratio.

Read on to learn more about how your LVR can impact your experience as a first-home buyer.

What is LVR in home loans?

LVR is a percentage figure that lenders use to determine the level of risk your home loan poses. It represents your loan balance relative to the current value of the property.

Most banks and lenders will lend up to 80% of the property’s value. As a borrower, that means that you’ll need to save up a 20% deposit. That said, some lenders will provide home loans to borrowers with smaller deposits even though they pose a greater risk. However, in order to protect themselves against this risk, lenders will often charge a premium, like lenders mortgage insurance (LMI) or a low deposit premium (LDP) in the event you default on your home loan. This cost is then passed onto you as the borrower, which can end up adding thousands of dollars on top of your loan.

Ultimately, the higher your LVR, the higher the risk of your home loan. But what exactly does that mean for you as a first-time borrower? Let’s take a look at how different LVR can impact your experience taking out a home loan.  

The impact of LVR on first home buyer loans

While your LVR is one of the main elements lenders use when assessing your home loan, this figure is more than just a representation of your risk. As a borrower, your LVR can impact you in a number of ways. It can influence your borrowing power, loan interest rates and the types of features and facilities you can access as part of your mortgage.

To give you a better idea of how LVR could impact your experience as a borrower, we’ve pulled together a few example scenarios to demonstrate the effects of both high and low LVR loans.

High LVR loans

A high LVR loan is a type of mortgage where the loan amount represents a high percentage of the property's value. Typically, an LVR above 80% is considered high. This means you’re financing more than 80% of the property's purchase price with the loan, so you’ll have a smaller deposit.

Let's consider a first-home buyer looking to purchase a property valued at $500,000. They’ve managed to save up a deposit of $50,000, which represents 10% of the purchase price. That means they’ll need to take out a $450,000 loan to finance the rest of the purchase, leaving them with an LVR of 90%.

Because their LVR is above 80%, the borrower would likely need to pay LMI to protect the lender in case of default. The amount they’ll need to pay in LMI depends on a range of factors, including the lender, the size of the deposit and the insurer to name a few.

Not only will the borrower be up for LMI, but they could also have to pay higher interest rates to compensate for their high-risk loan. For example, rather than paying the standard loan interest rate of 4%, they have to pay 4.5%. Higher interest rates plus the addition of LMI are likely to increase their mortgage repayments.

Let’s take a closer look at the numbers. If the borrower were making monthly mortgage repayments, a standard loan with a 4% interest rate and no LMI would cost them roughly $2,387 monthly. Alternatively, a high LVR loan with a 4.5% interest rate and LMI added to the loan balance could come in at around $2,508 per month.

While high LVR loans can help first-home buyers enter the property market with a lower deposit, they come with increased costs and financial risks. Buyers should carefully consider these factors and explore their options to ensure they can manage the associated financial obligations.

Low LVR loans

A low LVR loan refers to a mortgage where the loan amount represents a lower percentage of the property's value. An LVR below 80% is generally considered low. This means you’ve got a larger deposit, so you’re financing less than 80% of the property's purchase price with the loan.

For the sake of this example, let’s see how a low LVR can impact a $500,000 property. A first-home buyer is looking to purchase a property valued at $500,000. They have a deposit of $150,000 that’s come from a combination of genuine savings and a cash gift from their parents. That means they’ll need to take out a $350,000 loan, leaving them with an LVR of 70%.

Since the LVR is below 80%, the borrower typically does not need to pay LMI, saving them on the need to fork out additional funds. Not to mention, their lender could be also offering more favourable interest rates as their low LVR is considered less risky. So, rather than paying a standard loan interest rate of 4% for example, they could be able to take advantage of a 3.5% interest rate.

It comes as no surprise that lower interest rates and the absence of LMI can significantly reduce monthly repayments. Based on a high LVR loan with a 4.5% interest rate and LMI added to the mortgage balance, the monthly repayments could come in at around $2,508. By comparison, a low LVR loan with a 3.5% interest rate and no LMI would set them back roughly $1,573 per month.

A low LVR loan can significantly benefit first-home buyers by reducing costs and monthly repayments while increasing financial security. However, it requires a larger initial deposit, which can be challenging for some buyers. Ultimately, it’s up to you to decide how you’d like to approach your home-buying journey and what path best suits your needs.

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Figures and rates in this article are for illustration only.

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).

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