What is Loan to Value Ratio?

How to Calculate LVR

Calculating your Loan-to-Value Ratio (LVR) is simple, and understanding it will help you make better decisions when securing a mortgage. The formula for LVR is:

LVR = (Loan Amount ÷ Property Value) × 100

This formula gives you the percentage of the property's value you are borrowing.

Example 1:

• Property Value: $500,000
• Loan Amount: $400,000
• LVR = (400,000 ÷ 500,000) × 100 = 80%

Example 2:

• Property Value: $600,000
• Loan Amount: $540,000
• LVR = (540,000 ÷ 600,000) × 100 = 90%

These examples show how LVR works in practice. As you can see, a higher loan relative to the property's value results in a higher LVR. A typical LVR in Australia is 80%, which is often the threshold at which lenders offer favourable interest rates and avoid charging Lenders Mortgage Insurance (LMI).

The LVR is an essential factor lenders use to assess the risk of lending you money. Understanding how to calculate LVR will help you figure out how much deposit you'll need. For example, over 90% of lenders in Australia require LMI when the LVR exceeds 80%, which can cost anywhere from $5,000 to $15,000 depending on the loan amount.

The following pie chart illustrates how a typical home loan is broken down, showing the proportion of the loan amount, deposit, and Lenders Mortgage Insurance (LMI) involved.

As you can see from the breakdown, a smaller deposit or higher LVR can increase the proportion of your loan that goes towards LMI, affecting the overall cost of your home loan.

At Stryve Finance, we can help you understand your LVR and how it affects your mortgage options, ensuring you make well-informed decisions throughout the home loan process.

The Impact of LVR on Your Loan

The Loan-to-Value Ratio (LVR) significantly affects your mortgage. Lenders use LVR to assess the risk of lending you money. Essentially, the higher the LVR, the more you're borrowing in relation to the property's value, which means the lender is taking on more risk.

As shown in the chart below, higher LVRs typically lead to higher interest rates, highlighting the impact of LVR on the cost of your mortgage.

This illustrates how an increase in LVR can significantly affect the interest rates offered by lenders, reinforcing the importance of maintaining a lower LVR for better loan terms.

Lenders view high LVRs as riskier loans. This is because if the property's value decreases or you default on your loan, the lender may struggle to recover the full amount. As a result, higher LVRs can lead to stricter loan conditions, including:

• Higher interest rates
• The requirement to pay Lenders Mortgage Insurance (LMI)
• Increased scrutiny of your financial situation

On the other hand, a lower LVR indicates you have more equity in the property, reducing the lender's risk. With a lower LVR, you're also more likely to be offered a better interest rate and more favourable loan conditions.

How LVR Affects Borrowing Power

LVR is also directly linked to your borrowing power. With a lower LVR, you have more equity in your property, which may allow you to borrow more. However, as your LVR increases, lenders may restrict how much they are willing to lend you, as they perceive higher LVR loans to be more risky.

For example, if you have a 20% deposit, resulting in an 80% LVR, you're more likely to be approved for a larger loan and avoid paying LMI. However, if your LVR is above 80%, your borrowing capacity may be limited, and you will likely need to pay LMI, which increases your overall borrowing costs.

Interest Rates and LVR

Interest rates are heavily influenced by LVR. For instance, borrowers with an 80% LVR typically receive rates of around 3.5%, while those with a 90% LVR might face rates as high as 3.8% or more. A higher LVR means lenders face greater risk and will likely charge higher interest rates to offset that risk.

Lenders Mortgage Insurance (LMI) and LVR

When your Loan-to-Value Ratio (LVR) exceeds 80%, you'll likely be required to pay Lenders Mortgage Insurance (LMI). This insurance protects the lender in case you default on your loan. While LMI doesn't benefit the borrower, it is often necessary when you are unable to make a larger deposit.

When is LMI Required?

LMI is required when the LVR exceeds 80%. This means that if you are borrowing more than 80% of the property's value, you'll need to pay LMI to protect the lender against potential default. While this doesn't directly benefit you, it does allow you to secure a loan with a smaller deposit.

For example:

• LVR = 85%: If the property value is $500,000 and you borrow $425,000, you'll need to pay LMI.
• LVR = 90%: If the property value is $600,000 and you borrow $540,000, you'll be required to pay LMI, which can be pretty costly depending on the size of your loan.

Check this article LMI explained for more details information about LMI.

Typical LVR Thresholds in Australia

In Australia, most lenders set specific Loan-to-Value Ratio (LVR) thresholds that impact the conditions and costs associated with your home loan. These thresholds are crucial in determining the amount you can borrow, your interest rate, and whether you will need to pay Lenders Mortgage Insurance (LMI).

The table below compares the typical LVR thresholds in Australia, showing how different LVRs affect your loan conditions and the need for Lenders Mortgage Insurance (LMI).

This table provides a clear comparison of LVR thresholds and their associated costs, helping you better understand how varying LVRs can impact your mortgage application and approval.

Common LVR Ratios

• 80% LVR: This is typically the ideal LVR for most homebuyers. If you have a 20% deposit, you'll be able to secure a loan without needing to pay LMI. At this level, you'll likely get more favourable interest rates and loan conditions.
• 90% LVR: If your deposit is smaller, typically around 10%, your LVR will be 90%. While it's still possible to obtain a loan at this ratio, you will likely need to pay LMI. In addition, lenders may charge a higher interest rate due to the higher risk associated with a higher LVR.
• 95% LVR: This is a standard threshold for first-time homebuyers. Some government programs, such as the First Home Loan Deposit Scheme, enable first-time buyers to secure a loan with as little as a 5% deposit, with 95% LVR loans representing 20% of all first-home buyer loans in 2020.

What Does It Mean for Loan Approval?

Lenders generally prefer an LVR of 80% or below, as it indicates that the borrower has a greater equity share in the property. When your LVR is below 80%, the lender's risk is lower, which often results in:

• Better interest rates
• More favourable loan terms
• A smoother loan approval process

On the other hand, as your LVR exceeds 80%, lenders view you as a higher-risk borrower. This could mean higher interest rates, greater LMI requirements, or stricter loan conditions. Some lenders may also limit the loan amount or impose additional fees to mitigate the increased risk associated with a higher LVR.

Property Valuation and Its Effect on LVR

When applying for a mortgage, the Loan-to-Value Ratio (LVR) plays a critical role in determining how much you can borrow. Property valuation can significantly affect your LVR, as 70% of Australian lenders use their own appraisals instead of the purchase price to calculate the LVR, which may result in a 2-5% difference in the final loan amount.

How Valuation Affects LVR

During the loan approval process, the bank or lender will often require a property valuation to confirm the property's market value. The bank's valuation may differ from the purchase price you've agreed upon with the seller. This difference can directly affect your LVR.

Example 1:

• Purchase Price: $600,000
• Bank Valuation: $590,000
• Loan Amount: $540,000 (90% of purchase price)
• LVR Based on Valuation: $540,000 ÷ $590,000 = 91.5%

In this example, the bank values the property lower than the agreed purchase price, which increases the LVR and could result in a higher interest rate or the need to pay Lenders Mortgage Insurance (LMI).

Example 2:

• Purchase Price: $500,000
• Bank Valuation: $510,000
• Loan Amount: $400,000 (80% of purchase price)
• LVR Based on Valuation: $400,000 ÷ $510,000 = 78.4%

If the bank's valuation is higher than the purchase price, your LVR might be lower than expected, and you could have more borrowing power or avoid paying LMI.

Market Value vs Bank Valuation

It's essential to understand the difference between market value and bank valuation. While market value is what you agree to pay for the property, the bank valuation is the amount the bank believes the property is worth, based on factors such as location, condition, and comparable sales. In some cases, the bank may value a property lower than the agreed purchase price, which can increase your LVR and affect your loan terms.

Why Property Valuation Matters

Property valuation plays a critical role in the approval of your home loan. If your LVR ends up being too high, you might face the following challenges:

• The need to pay LMI
• Higher interest rates
• Limited loan approval or lower loan amounts

Understanding how property valuation works and how it impacts your LVR will help you navigate the home-buying process with more confidence.

How to Improve Your LVR

While understanding your Loan-to-Value Ratio (LVR) is crucial, you may also be looking for ways to improve your LVR to get better loan conditions, avoid paying Lenders Mortgage Insurance (LMI), and reduce the cost of your mortgage. Here are several ways you can work toward improving your LVR:

1. Increase Your Deposit

The most straightforward way to improve your LVR is by saving for a larger deposit. A larger deposit means that you'll need to borrow less, resulting in a lower LVR. For example, if you have a 20% deposit, your LVR will be 80%, which means you'll avoid paying LMI. The higher the deposit you save, the better the loan conditions you're likely to receive.

• Example: A $600,000 property with a 20% deposit requires a $480,000 loan, resulting in an LVR of 80%.
• On the other hand, a 10% deposit would result in an LVR of 90%, and you'll need to pay LMI.

2. Buy a Less Expensive Property

If you're having difficulty saving for a larger deposit, consider purchasing a less expensive property. The cheaper property will lower the amount you need to borrow, effectively lowering your LVR. While this may not be ideal for everyone, it can be an effective strategy to reduce your LVR and avoid high LMI costs.

3. Repay Existing Debts

If you have existing debts such as credit cards or personal loans, consider paying them down before applying for a home loan. By reducing your debt, you will increase your available equity, which in turn can lower your LVR. Not only will this help reduce your LVR, but it can also improve your overall borrowing power.

4. Consider Government Programs for First-Time Buyers

Several government-backed programs in Australia can help first-time home buyers secure a loan with a smaller deposit. Programs like the First Home Loan Deposit Scheme and First Home Owner Grant can allow you to borrow up to 95% of the property value, lowering your LVR and, in some cases, helping you avoid LMI.

These programs are often a great option if you're a first-time buyer and don't have the full 20% down payment.

5. Get a Guarantor

Another way to lower your LVR is by using a guarantor. A guarantor is typically a family member who provides security for your loan, typically by pledging equity in their property. This can allow you to borrow more and lower your LVR, enabling you to avoid LMI even with a smaller deposit.

Common Questions About LVR

When it comes to the Loan-to-Value Ratio (LVR), many questions often arise. Here are some of the most frequently asked questions to help you better understand how LVR works and how it affects your mortgage:

1. What is a Good LVR?

A good LVR is typically 80% or lower. This means you have a deposit of 20% or more, indicating a strong equity position in the property. With an 80% LVR, you'll avoid paying Lenders Mortgage Insurance (LMI) and will likely receive more favourable loan terms, such as lower interest rates.

2. How Does LVR Impact My Ability to Get a Loan?

LVR is one of the key factors lenders use to assess loan risk. A lower LVR (such as 80% or lower) usually increases your chances of securing a loan with favourable terms. Lenders typically view lower LVRs as less risky because they mean you have more equity in the property, reducing the risk of loss if the property value declines.

However, a higher LVR (above 80%) can make it more challenging to secure loan approval and often results in higher interest rates and the need for LMI.

3. Can I Get a Mortgage with a High LVR?

Yes, it is possible to get a mortgage with a high LVR, but it comes with challenges. If your LVR is above 80%, you will typically be required to pay Lenders Mortgage Insurance (LMI), which increases the cost of the loan. Additionally, your loan's interest rate may be higher because the lender is assuming greater risk. To improve your chances of approval with a high LVR, you may need to provide additional documentation to demonstrate your ability to repay the loan.

At Stryve Finance, we can guide you through the process, help you understand how LVR affects your borrowing capacity, and ensure you're equipped to make informed decisions about your mortgage.

4. How Can I Avoid Paying LMI?

There are a few ways to avoid paying Lenders Mortgage Insurance (LMI):

• Save a Larger Deposit: By saving at least a 20% deposit, you can avoid paying LMI and keep your LVR at 80% or below.
• Use a Government Scheme: Programs such as the First Home Loan Deposit Scheme can help first-time buyers avoid LMI with a smaller deposit.
• Consider a Guarantor: If a family member is willing to act as a guarantor, you may be able to avoid LMI by borrowing a higher percentage of the property's value without paying extra insurance.

At Stryve Finance, we specialise in finding the best solutions for you to help reduce LVR costs and navigate the complexities of mortgage options.

Conclusion

Understanding your Loan-to-Value Ratio (LVR) is crucial when purchasing a home in Australia. It impacts your loan approval, the interest rate you are offered, and whether you'll need to pay Lenders Mortgage Insurance (LMI). A lower LVR typically results in better loan terms, including avoiding LMI and securing lower interest rates.

As a mortgage broker, Stryve Finance helps you navigate the complexities of LVR with tailored advice tailored to your financial situation. With our expertise, you'll understand how to calculate your LVR and what it means for your home loan application. This knowledge empowers you to make informed decisions about your deposit, borrowing capacity, and repayment options.

At Stryve Finance, we are committed to helping clients like you secure the best possible mortgage deals. Whether you're a first-time buyer or refinancing your home, we provide practical solutions to reduce your LVR and streamline your loan application. Our expert advice helps you lower your LVR and avoid unnecessary costs such as LMI, making the home-buying journey more straightforward and more affordable.