Loan to value ratio (LVR)
What is the LVR?
The term LVR is an acronym for “Loan to Value Ratio” and is also sometimes referred to as the LTV. Lenders will calculate the LVR of your loan and will take this into account when assessing your application. LVR is basically the amount you are borrowing represented as a percentage of the value of the property being used as security for the loan. Therefore the lower the LVR, the lower the risk is to the bank.
How is LVR Calculated?
LVR is calculated by dividing the loan amount by the actual purchase price or valuation of the property, then multiplying it by 100. For example:
An applicant would like to borrow a loan amount of $240,000. The property that the applicant is using as security is valued at $300,000.
LVR is calculated in this manner:
$240,000 ÷ $300,000 x 100 = 80% LVR
What is the LVR? Calculate the LVR for your home loan
What is the maximum LVR that I can borrow?
The LVR that you can borrow would depend on the loan amount you are wishing to take, the location of your property, your credit history and the type of loan you are applying for. Generally full doc applicants (income evidence provided) can borrow up to 80% LVR easily and up to 90% or 95% if they are in a strong financial position. On the other hand low doc applicants (no income evidence) can borrow up to 60% LVR easily and up to 80% LVR if they are in a strong financial position.
Is it possible to borrow 100% LVR?
One option for borrowers who would like obtain a high LVR loan is to have a guarantor support the application. The guarantor may be a family member or a friend who has ownership and equity in another property. The guarantor would put up a portion of this property to secure a portion of the loan being applied for. This act of the guarantor necessarily reduces the LVR enabling the applicant to loan up to 100% of the value of the property they are buying.
If the property value increases or if you make extra repayments on your loan then at some point the guarantor may no longer be required as the LVR would be low enough to be accepted by the bank without the need for additional security.
Without a guarantor it is effectively impossible to borrow 100% LVR.
What LVR is considered “high risk”?
Generally lenders consider loans with an LVR over 80% of the property value to be a high risk. This is why Lenders Mortgage Insurance (LMI) is needed for any loan that is 80% LVR or higher. By having LMI, the risks associated with the loan can be minimised and the lenders can approve your loan without the risk of losing any of their money.
We have created a LMI calculator to help your estimate the LMI Premium that you will pay if you are borrowing over 80% LVR.
When will I be charged LMI?
LMI is generally charged for loans with an LVR of 80% and above. This is done in order to protect the lender from any risks of defaults. Since an LVR of 80% is considered as a “high risk”, to somewhat reduce this risk, it is beneficial for the lender to require LMI.
For low doc loans LMI is required at a much lower LVR. Due to the lack of documents the borrower can provide to prove their earnings and income, the lender is more at risk from defaults. Because of this the LMI for low doc loans is required at 60% LVR and above instead of the normal 80% LVR for full doc loans.
Find out more about LVRs!
Please enquire online if you would like to get expert advice on the LVR of your loan from one of our mortgage brokers.
