What is loan to value ratio (LVR)?
You might be wondering, what is LVR (loan to value ratio)? It’s the borrowed amount relative to the value of the property being bought or refinanced.
The loan to value ratio (LVR) is the amount of money borrowed in proportion to the value of the property being purchased or refinanced. In Australia, the LVR is an important consideration for both borrowers and lenders, as it can impact the eligibility for home loans, the amount of money a lender is willing to lend and the potential requirement for Lenders Mortgage Insurance, or LMI.
Why does LVR matter?
LVR affects your borrowing power as lenders use LVR to determine how much they can lend against a property. If you have an LVR of more than 80% you may also have to pay LMI.
Please note that Unloan does not service loans with a LVR of more than 80%.
How is LVR calculated?
The loan to value ratio is typically expressed as a percentage and is calculated by dividing the amount borrowed by the current market value of the property.
LVR = (Loan Balance) / (Property Value)
For example, if a borrower wants to buy or refinance a property worth $800,000 and borrows $640,000, their LVR would be 80% ($640,000 / $800,000 = 0.80).
Why it's important?
In general, the lower the LVR, the more likely a borrower is to be approved for a loan. This is because a low LVR indicates that the borrower has a larger amount of equity in the property, which is seen as less risky by lenders. Put simply, the more money a borrower has, the less money the lender needs to lend out.
Many home loan lenders offer more favourable interest rates when you have a lower LVR. For example, a customer with a 70% LVR may be able to access a better rate than a customer with an 80% LVR. At Unloan, we offer competitive low rates for all our customers.
Most lenders only lend up to 80% LVR, which means, as a home buyer you'll need to save a 20% deposit. Some lenders will lend more than 80%, but will charge additional premiums, like the Lender's Mortgage Insurance (LMI), which is designed to protect the lender and not the borrower.
In summary, LVR is an important consideration for both borrowers and lenders. By understanding the LVR and how it is calculated, borrowers can make better informed decisions about their home loans.
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.
