What is Loan-To-Value Ratio?

house-money-and-piggy-bank

Are you willing to own a property?

Well then, you might be quite aware of the processes involved in buying a house and have even come across the term LVR when talking about buying a house or planning for a home loan.

So, what exactly is LVR?

Whenever you plan to borrow a loan from a designated lender, you do not receive 100% of the loan amount for the property you’re willing to buy. Your lender (banks or lending agencies) will qualify you for a certain percentage of the property’s value as your home loan.
This depends on the Loan-To-Value Ratio (LVR).
In financial terms, LVR is the ratio of the loan that you’ll be receiving to the total value of the property you are willing to buy.

Banks usually calculate the LVR to know the risks of providing you the home loan. As banks themselves do not want to go through losses(in case you fail to repay the debt), they have certain system margins that provide an access to permit a home loan.

The banks decide the LVR ratio according to the Risk Profile. Higher LVR implies higher risks for the lenders. If the LVR value exceeds 80%, it no longer remains an ideal case, and that’s when the banks require insurance. Such insurance is called Lender Mortgage Insurance (LMI).

How to calculate LVR?

Loan to Value Ratio is the ratio of loan amount to the actual purchase price (or valuation of the property), then multiplying it by 100.
Here's an example. Let's say you’d like to borrow $480,000, and the property you’re trying to buy is worth $600,000.
Then, the LVR of the home loan would be calculated as:
($480,000 loan ÷ $600,000 property value) x 100 = 80% LVR
You need to know that, if the purchase price differs from the valuation, then the mortgage insurer and the lender will use the lower value of the two to determine the LVR.

Maximum LVR that you can get

The Loan-to-Value Ratio (LVR) that the banks will allow you to borrow depends on the amount of home loan you need, the location of your property, your credit history, and the type of loan that you are applying for.

Applicants with full documents provided or full doc applicants (including income evidence) can borrow up to 80% LVR. 80% LVR is considered to be the ideal case.

However, some strong applicants can potentially borrow between 90% and 95% LVR as well!
Applicants with fewer documents provided or low doc (no income evidence) are able to borrow up to 60% and probably up to 80% LVR if they’re in a strong financial position.

Is 100% LVR possible?

Possibly, yes! There are very few chances of getting a 100% LVR because lenders accepting such a huge risk in their business are quite rare. One option for borrowers who need a high LVR loan is to have guarantor support to their application or a willingness to pay higher rates of interest along with LMI. This enables you to borrow 100% LVR. Without a guarantor or LMI, it’s impossible to borrow 100% LVR.

What should I do to get a higher LVR as a customer?

As we already know, 20% of the down payment is the ideal scenario. In order to permit a higher rate of LVR, your lenders will assess your financial background as higher LVR increases the risks of loss for them.

But under certain circumstances, they provide a home loan considering the LVR more than 80%. Such cases are granted under the following considerations:

  • A good credit score: Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. It is an important influence to get a higher LVR.
  • Less loan amount: High LVR is not much risky for the lenders in cases where the loan taken by the customer is less.
  • Low debt with respect to income: There is a high chance of getting a greater value of LVR if your income rate is safe enough for the repayment.
  • Age: A minor consideration to provide high rates of LVR is your age. For instance, when applying for a home loan, a 22 years old guy will be able to get a higher LVR than a 55 years old man, considering his retirement to occur soon. As for the 22 years old guy who has a long way to go for the repayment, the banks will not be just as sure.

What are the factors that affect LVR?

Several factors can affect your LVR:

  • Features of the property you’re willing to buy: Size of property, location, property value, etc.
  • Differences between the banks: Each bank has its system of evaluating the accessibility to home loan LVR.
  • Your financial history: A detailed assessment will be done by your lender over all of your financial histories to know if you are capable of loan repayment or not.
  • Refinancing: Your LVR will be calculated differently as you look for a refinance because the property you will be owning in the future might have a different value than that in which you purchased. The lenders will evaluate the current market value of your property to calculate the refinanced LVR.
  • Restrictions of LVR by the bank: If you’re a high-risk borrower, the bank might designate a limit on your maximum LVR to reduce the risk of your home loan. If the property you are purchasing is difficult to sell, the lender may end up reducing your LVR.

Why is LVR necessary?

As a lender, LVR is very important to mark a Risk Profile. Each bank has its own risk profiles, and according to that, they provide different LVR for different customers. Lenders use LVR for pricing review, check whether LMI is needed or not, and sometimes for postcode restrictions. As a loan applicant, LVR is quite important for you as well. Knowing that the banks will not provide 100% of LVR, you can make some good savings, reduce the chances of paying LMI, and even get lower interest rates.
So, one way or the other, it’s always a “Win-Win” situation.

Author:

Kiran Thapa

Ojashwi Sharma

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