LVR and its impact on home loan interest rates

Your loan-to-value ratio, or LVR for short, is one of the main factors banks and lenders consider when assessing your home loan application. But did you know that your LVR could have an impact beyond securing finance?

Read on to learn more about how your LVR could impact your home loan interest rates.

What is LVR?

LVR is a percentage figure that represents the amount you’ve borrowed relative to the bank’s valuation of the property. LVR is used by lenders to assess the risk of loaning money to you as a borrower.

Most lenders require an LVR of 80% or less, meaning you’ll need a 20% deposit to buy the property. However, some lenders might allow you to borrow more than 80% of the property’s value, but they’ll often charge lenders mortgage insurance (LMI) or a low deposit premium (LDP) to protect themselves in the event you default on your mortgage.

The higher your LVR, the more money you’ll need to borrow to fund the purchase of a property. A high LVR home loan means higher risk for the lender, as you have less equity in the property. On the other hand, a low LVR mortgage means you have more equity in the property and pose less risk to the lender.

You can learn more about calculating your own LVR here. But remember, you’ll also need to fork out for a range of different upfront costs when buying a home, so be sure to include them in your calculations along with your deposit.

While your LVR could mean the difference between paying LMI or LDP or not, your LVR can also affect the interest rate you’re charged on your home loan.

How LVR impacts your mortgage interest rate

High LVR home loans are considered higher risk by lenders. And while most lenders will charge additional penalties, like LMI or LDP, a high LVR could have other repercussions for your loan.

In some instances, your LVR could impact the interest rate charged on your home loan. Essentially, the higher your interest rate, the higher your risk as a borrower, so you could be required to borrow with a higher interest rate too.

Some lenders use tiered pricing based on LVR. For example, an LVR below 60% might qualify for the lowest rates, 60-80% might have slightly higher rates and above 80% could be significantly higher.

That said, interest rates often vary across lenders, so chances are their approach to high LVR loans differs also.

Other effects of LVR

A high LVR could impact your loan beyond your interest rate. Here are a few more implications of high LVR loans:

• More stringent lending criteria: A high LVR might reduce the chances of loan approval or require additional documentation and scrutiny during the approval process. With a smaller deposit, lenders may apply stricter criteria to your loan application, including a more thorough assessment of your income, expenses and credit history.
• Subject to LMI or LDP: For loans with an LVR over 80%, banks and lenders will often charge you for LMI or LDP. These premiums are designed to protect the lender in case you default on your home loan. However, the cost is passed onto you as the borrower. You can choose to pay it upfront or add it to the total of your loan, which you’ll also have to pay interest on. Plus, if you’d like to refinance your loan before you’ve built up 20% equity, you could get hit with another round of LMI or LDP.
• Lower borrowing power: Some lenders might reduce the amount you can borrow if your deposit is below 20%. This could limit your options when it comes to finding a property to buy.
• Higher mortgage repayments: Higher interest rates lead to higher mortgage repayments, so you’ll need to make sure you can afford to service your loan if rates increase.
• Limited loan features and facilities: Higher LVRs may come with stricter loan terms, like shorter fixed-rate periods or more frequent rate adjustments in the case of variable-rate loans. Plus, you might not have access to certain loan features or facilities, like offset accounts or redraw facilities.

Your LVR could have more of an impact on your home loan than you initially thought. From influencing your interest rates to affecting your borrowing power, it’s worth being aware of your LVR if you’re in the market for a new home.

Whether you’re looking to buy a home or refinance, Unloan has you covered. Check out some of the great features you could take advantage of with an Unloan home loan.

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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.