Your Loan to Value Ratio indicates the amount you are borrowing as a percentage of the value of the property. The higher your LVR, the more money you need to borrow. The lower your LVR, the less money you intend to borrow.
A high LVR = higher risk.
A low LVR = lower risk.
The greater the deposit you have to put towards the purchase of your home, the lower your LVR will be. Now the banks have a magical LVR percentage they like to see. If your LVR exceeds this figure, you will be up for an additional fee called Lenders Mortgage Insurance(LMI).
This magical LVR figure banks will like to see is 80% or less.
Let’s see how the calculations work and where your LVR is currently sitting.
To calculate your LVR is pretty straightforward. You’ll take your loan amount, divide it into the purchase price or valuation of the property(whichever is lower) and multiply by 100. We love easy calculations!
If your calculations fall above the magical 80%, do not fear. There are ways our home loan experts can assist you to reach a positive loan application with an above 80% LVR. Read on.
In short, yes, as your LVR will dictate the additional fees you will pay (or not pay) over the life of your loan. LVR is one of the ways that banks calculate risk. However, if your LVR is above 80%, it is not the end of the world. It simply means you will need to pay Lenders Mortgage Insurance(LMI) to make up for your deposit shortfall. LMI is an additional fee that you will pay on top of your monthly repayments, BUT it also allows you to own your property when you lack the full deposit amount! You see, there are silver linings.
Banks and lenders are clever fellows in that they will consider both options but will usually choose the lower of the two valuations. They do so to cover themselves. Plus, both valuations and purchase prices can be skewed. You may purchase your property for a lower price from a family member or friend. Or a valuer may do a simple drive-by valuation as opposed to an in-depth internal and external inspection.
It all comes down to your LVR and your level of risk related to your application. Banks use differing methods, so it is worth having the discussion with our experts to determine your LVR and the best course of action.
Chances are, if your LVR is under 80%, you are borrowing under $800,000, do not know the vendor personally and you have supplied full income and assets information, then you may not be subject to a valuation.
So, you have plugged in your figures and your LVR is above 80%. Don’t freak out. Take a deep breath and keep reading.
If you are a strong applicant – which means you have a solid income, low additional debt, high career prospects and a good credit rating, you may be eligible to borrow up to 90-95% LVR. If you are a low doc applicant low doc loan, your LVR may be lower.
The best way to decrease your LVR is to have a guarantor on your loan. Having a guarantor basically means your deposit is covered by your guarantor’s assets, letting you potentially borrow up to 100% of your loan value.
Alternatively, you can save a larger deposit to help decrease the amount you need to borrow.
The option you choose will be influenced by a number of factors. Namely, your personal situation, the market, interest rates, your deposit amount and where you see your future. It is best to chat with one of our home loan experts to help choose the right option for you.
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At Organic Home Loans, we are here to assist you understand your LVR and how it affects your borrowing power. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Understand the true impact LVR has on your ongoing home loan fees and repayments. Speak to our home loan experts today.
