What Is Loan to Value Ratio (LVR)? What You MUST Know For Your Home Loan!

What Is Loan to Value Ratio (LVR)?

When dealing with a home loan, you will most likely come across the Loan to Value Ratio term. Obviously, everyone who wants to apply for a home loan should consider this term and what it implies, as it affects your borrowing power.

Therefore, in the following lines, we’ll discuss the Loan to Value Ratio – LVR.

The Basics

The Loan to Value Ratio is used by lenders to describe the amount that you need to borrow so that you can buy a certain property.

Basically, it can be seen as the amount you need to borrow, which is calculated as a percentage of the property’s value assessed by a lender.

This so-called lender-assessed value is, as the term implies, how the lender has valued the property.

The Example

For example, let’s say that the property you wish to buy is valued at $500,000. On top of that, you also have a deposit of $100,000. In short, you will need to borrow $400,000 in order to buy the property of your choice.

To determine the Loan to Value Ratio, you simply divide the amount you need to borrow by the value of the property. For our example, you would have an 80% Loan to Value Ratio.

Still, keep in mind that this example does not include some of the costs and fees that you may also have to pay.

Loan to Value Ratio and Borrowing Power

Naturally, the lower the Loan to Value Ratio, the better for you as a borrower. This is because lenders consider a lower LVR as having a lower overall risk for them.

Moreover, when it comes to owning your very own home, a lower LVR also means that you’ll have a head start – right from the start, you will have more equity.

In the example that we’ve mentioned above, the result was an 80% Loan to Value Ratio. 

Loan to Value Ratio Over 80%

When your Loan to Value Ratio goes over 80%, you may face a higher cost when getting a home loan. This is because you will most likely be required to pay for LMI – Lenders Mortgage Insurance – as well.

It is important for you to remember that LMI protects the lender and not the borrower. If you default on your home loan, the LMI will protect the lender, even though you will be paying the insurance premium.

Moreover, a higher Loan to Value Ratio also comes with an increased LMI cost.

The Bottom Line

When considering the Loan to Value Ratio, it is important to take LMI into account as well. You have to determine whether paying the insurance premium is a good idea in your situation.

Given that a home loan comes with different circumstances for every particular borrower, it is better if you learn everything about LMI and Loan to Value Ratio and consider their alternatives as well.

In case you have any more questions or need further information on this topic, you can always contact us. Our staff will provide you with all the details you need and will also guide you through the entire process of getting a home loan.

With years of experience in this field, we’ll make sure to find you the best lender possible so that you don’t miss any benefits and you are in a favourable position when buying your home!

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