How LVR can affect your borrowing power
The term LVR is an acronym for Loan to Value Ratio and is also sometimes referred to as ‘LTV’.
The LVR is the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan.
Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the risk is to the bank.
How is LVR calculated?
Loan to Value Ratio is calculated by dividing the loan amount by the actual purchase price or valuation of the property, then multiplying it by 100.
For example, let’s say that you’d like to borrow $240,000 and the property that the applicant is using as security is valued at $300,000.
The LVR of the home loan would be calculated like this:
($240,000 loan ÷ $300,000 property value) x 100 = 80% LVR
Have you used any of the other mortgage calculators?
Some may be applicable to your situation.
Alternatively, call us on 1300 889 743 or complete our free assessment form to find out what your LVR means for your ability to borrow.
Do I use the valuation or purchase price?
If the purchase price is different to the valuation then the lender and their mortgage insurer will use the lower of the two to determine the LTV.
This is typically common in off the plan purchases, where the value may have increased or decreased since the date when the contract was signed.
The other common situation where the purchase price and bank valuation are different is when someone is buying a property off of their family at a discounted price.
This is otherwise known as a favourable purchase.
We have some lenders that can calculate the LVR by using the valuation instead of the purchase price.
However, they will only do this if the contract of sale to purchase the property was signed more than 3 months prior to the date that you apply for the loan.
Further, most lenders also require the contract to be over 12 months old.
For example, you buy a unit off the plan for $300,000. When you need to settle the unit, 12 months later, the valuation is $360,000.
In this situation, most lenders would calculate the LVR based on the bank valuation.
This may result in a lower LMI premium or may mean that you do not need LMI at all!
Please note that your perception of the value may be different to that of the bank’s valuer!
In most cases, the actual value is somewhere in between your estimate and the bank’s valuation.
How do banks calculate the LTV for a refinance?
If you’re refinancing a property that you already own then the lender will use their valuation of the property to calculate the LVR.
This is because you may have purchased your property some time ago so the price that you paid for the property is no longer relevant.
The property market may have moved or you may have renovated the property so an independent bank valuation will be much more reliable.
Do lenders always value the property?
No. Some banks do not require a valuation for a property that is being purchased if it meets particular criteria.
Others will use a desktop valuation (AVM or computer generated) or restricted assessment (drive by valuation), instead of a more expensive and time consuming full valuation which requires a physical inspection of the property.
Most banks use different methods to value your property depending on how high your LVR is and the overall risk of your application.
Will my property need a valuation?
As a general rule, the bank will not value your property and will adopt the price on the Contract of Sale to calculate your LVR if you meet the below criteria:
- You loan is at or below 80% LVR.
- You’re purchasing the property.
- Your loan is under $800,000.
- You have provided full evidence of your income.
- Your property is in a capital city or major regional centre.
- The purchase is through a licensed real estate agent.
- The property is not a new dwelling (off the plan or new building).
- You are not related to the vendor.
What is the maximum LVR that I can borrow?
The Loan to Value Ratio (LVR) that the banks will allow you to borrow in depends on the home loan amount you need, the location of your property, your credit history and the type of loan you that are applying for.
Generally, full doc applicants (income evidence provided) can borrow up to 80% LVR.
Low doc applicants (self employed with no income evidence) can borrow up to 60% and possibly up to 80% LVR, if they’re in a strong financial position.
Is it possible to borrow 100% LVR?
One option for borrowers who need to borrow at a high LVR loan is to have a guarantor support the application.
The guarantor can be a family member or a friend that has ownership and equity in another property.
In guaranteeing the loan, they put up a portion of their property to secure a portion of the home loan being applied for.
This enables you to borrow 100% LVR!
If the property value increases or you make extra repayments on your loan, the guarantor may no longer be required.
This is because the Loan to Value Ratio would then be low enough for the banks to accept it, without the need for additional security.
Without a guarantor, it’s impossible to borrow 100% LVR.
However, there are other no deposit home loan options available where you’re not required to have a deposit that you’ve saved yourself.
When will I be charged LMI?
Lenders Mortgage Insurance (LMI) generally applies for home loans with an LVR of 80% and above.
Home loans for 80% LVR and above are considered to be a high risk LVR to most lenders.
The reason is that if you were to default on your mortgage, the mortgage insurer charges the lender a risk fee, which is passed on to you as an LMI premium.
For low doc loans, the borrower lacks the necessary documentation required to prove their earnings and income.
This means that the risk is greater for the lender and as such, LMI is required at 60% of the property value and above.
What LVR is considered to be a ‘high risk’?
Generally, lenders consider loans with a Loan to Value Ratio 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% LTV 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 you estimate the LMI premium you’ll pay when borrowing over 80%.
Why would my bank restrict my LVR?
The banks use Loan to Value Ratio to manage the risk of the loan applications they receive.
If you’re a high risk borrower, the bank may put a cap on your maximum LVR in order to reduce the risk of your home loan.
For example, you may apply for pre-approval to buy a home for $500,000, with a loan of $475,000 (95% LVR).
However, if you have a default on your credit file, you may only be able to borrow as little as 90% or 80% LVR.
The lender may also reduce your Loan to Value Ratio because the property you are purchasing may be difficult to sell.
Your LVR will be reduced, if you’re buying a property:
- That is relatively unique
- In a remote location
- That has restrictions on it such as heritage-listed properties, serviced apartments and display homes
- That may be a combination of the above and likely take more than 6 months to sell
What else may affect my LVR?
Please complete our free assessment form or contact us on 1300 889 743 and our mortgage brokers will provide you with expert advice on the Loan to Value Ratio of your loan.