With regards to home loans, the LVR (Loan to Value Ratio ) is simply the amount you are borrowing from a lender expressed as a percentage.
For example, if you are buying a property which has a purchase price of $400,000 and you are borrowing $300,000 of that purchase price, then the LVR would be 75% as you are borrowing 75% of the property’s value.
If you are purchasing a property which costs $500,000 and you are borrowing $100,000 then the LVR would be 20%.
Loan to value ratio (LVR) has two main consequences:
- How readily lenders will approve your home loan application. Generally speaking, the lower the LVR, the easier you will find it to get the approval from a lender.
- Whether or not you will have to pay Lenders’ Mortgage Insurance (LMI). As a general rule, LMI is payable on full doc loans when the LVR is above 80%. LMI is usually payable for low doc loans when the LVR is above 60%. The reason for this is that low doc loans represent somewhat more of a risk to the lender.
is a formula they have devised based on experience of loan defaults that attempts to minimise risk from borrowers defaulting.
The LVR is expressed as a percentage and calculated by taking the amount of the loan, divided by the value of the property and then multiplying it by 100.
In this example a $225,000 loan on a $283,000 property – the LVR is 79.5% meaning that no mortgage insurance is required. 225/283=.795×100=79.5% LVR
Lets look at another example of a $225,000 loan, but this time on a $250,000 property where the 80% cut-off is exceeded by 10% requiring insurance. 225/250=.9×100=90% LVR
The value of the property is determined by the lenders valuer and is NOT the purchase price. You could be in for a nasty surprise at settlement if you haven’t taken this into account. There may be the difference between the valuer’s price and the purchase price that you have to cover yourself.
Contact Mortgage Brokers Central Coast for advice on finance and mortgage insurance. They have access to a much greater range of products and lenders than banks so you should be able to get something to suit your situation.