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LVR Calculator
The LVR Calculator will help you work out your loan to value ratio.
Loan to value ratio (LVR) represents the value of a property used as security in the form of a percentage. LVR allows you to find out the financial value of a property and helps you decide whether you need to have lender mortgage insurance (LMI) or a low deposit premium on your home loan. Normally, you will need to pay LMI or a low deposit premium if the bank or lender gives you a loan that is more than 80% of the property value.
Banks and other financial institutions always evaluate the LVR when reviewing your loan application. The higher the loan to value ratio, the higher the risk is to the lender. A lower LVR means the lender will consider your loan to be a lower risk.
- LVR Calculator
- How is Loan to Value Ratio Calculated?
- How to calculate LVR when you get a low valuation?
- How to calculate LVR for an off the plan purchase?
- How to calculate LVR with a guarantor home loan?
- How to calculate LVR on a construction Loan?
- How to calculate LVR for Refinance?
- Does Your Property Need a Valuation?
- What is the Maximum LVR Amount Allowed?
- What is a High-Risk LVR?
- Why do Banks Put a Cap on LVR?
How is Loan to Value Ratio Calculated?
The calculation of LVR is quite simple. Divide the loan value by the actual purchase price or property value and multiply it by 100.
For example, if you are borrowing $300,000 and the property you are buying (or refinancing) is worth $375,000.
The LVR will be calculated as follows: ($300,000 loan ÷ $375,000 value of a property) x 100 = 80%
In this example, the loan amount of $300,000 is divided by the property value of $375,000 and gives an amount of 0.80 or an LVR of 80%.
However, if the loan amount is the same but the property value is $378,000, the LVR will be around 79%. In this case, no LMI or low deposit premium is required.
In this example, the loan amount of $300,000 is divided by the property value of $378,000 and gives an amount of 0.79 or an LVR of 79%.
A key factor to consider is that lenders do not consider the price you pay for the property when they are evaluating your LVR. Instead, they determine the value of a property through their own bank valuation. It is possible that the price determined by the valuer is different from the purchase price of a property, which we will get into shortly.
Having an LVR of 80% or less (e.g. 79%) means you avoid paying lenders’ mortgage insurance.
How to calculate LVR when you get a low valuation?
If you were looking at purchasing a property for $600,000 but the lender’s valuation comes in at $590,000 how do you calculate LVR? Let’s assume your loan amount is $480,000.
Unfortunately, the bank would adopt the lower value of the valuation and purchase price – so they would calculate LVR using $590,000.
In this example, the loan amount of $480,000 is divided by the property value of $590,000 and gives an amount of 0.8135 or an LVR of 81.35%. The purchase price of $600,000 would be ignored by the bank and the lower value would work.
As the LVR is now over 80% it would be considered a slightly higher risk, meaning you would need to pay Lenders Mortgage Insurance in order for the lender or bank to approve your application. LMI adds a significant cost to the price of your purchase, so it’s something best avoided if at all possible.
The good news is if the bank valuation comes in lower than your purchase price, and you have purchased the property subject to finance, you could look at getting out of the contract, negotiating a lower price with the purchasers, or even getting another bank valuation.
A low valuation isn’t the end of the road. You can talk to the agent to negotiate a reduction in the purchase price.
Read More: Negotiate the House Price 🏠 with a Real Estate Agent [Step-By-Step Guide]
How to calculate LVR for an off the plan purchase?
There can be cases where you have bought a home off the plan over 18-24 months before you need to settle the property and by the time settlement comes around the value of your home has increased.
So what happens to the LVR if you bought a property for $350,000, want to borrow $300,000 and the bank valuation comes in higher at $400,000?
In this example, the loan amount of $300,000 is divided by the property value of $400,000 and gives an amount of 0.75 or an LVR of 75%. The purchase price of $350,000 would be ignored by the bank provided 12 months have passed.
As the LVR is now UNDER 80% it would be considered lower risk, and not require Lenders Mortgage Insurance.
Buying off the plan can be good and bad depending on the final LVR.
Read More: First Home Buyer: The Definitive Guide for Brisbane
How to calculate LVR with a guarantor home loan?
Calculating LVR on guarantor home loans is done in much the same way, except in this scenario you have 2 houses being used as security instead of just 1.
Let’s say you were looking at buying a home for $500,000 and wanted to borrow 105% LVR, giving a total lending amount of $525,000 as a guarantor home loan. How is the LVR calculated?
This is an example of a typical guarantor home loan structure, with a maximum LVR of 80%. The total lending amount is $525,000 with $400,000 being secured against your home, and $125,000 secured against the guarantor’s home.
With guarantor home loans, the bank will structure 2 loans.
First, the bank will lend 80% LVR against the property you would like to purchase: $400,000 total lending.
In this example, the loan amount of $400,000 is divided by the purchase price of $500,000 and gives an amount of 0.80 or an LVR of 80%. Lenders’ Mortgage Insurance is not payable as the loan is under 80% LVR.
The remaining balance of your loan amount would be taken against your guarantor’s home. In this example, it would only be a 25% LVR against your parents’ home being the balance or $125,000 in lending.
In this example, the loan amount $125,000 is divided by the purchase price $500,000 and gives an amount of 0.25 or an LVR of 25%.
Overall guarantor lending can allow you to have an LVR over 100% but requires a guarantor to provide their property.
Read More: Guarantor Home Loans
How to calculate LVR on a construction loan?
If you were looking to buy some land for $300,000 and build a home for $300,000, how would LVR be calculated on your construction loan assuming the bank’s valuation was for $600,000 as if complete? What LVR would you get if you borrowed $270,000 against the land and $270,000 towards the building part?
In this example, the loan amount of $270,000 is divided by the vacant land value of $300,000 and gives an amount of 0.90 or an LVR of 90%. Lenders’ Mortgage Insurance would be payable and added on top of the loan.
The second part of calculating the LVR on a construction loan is using the as-if complete value, which is the combined amount of the land and the construction totalling $600,000.
In this example, the total loan amount of $540,00 is divided by the complete property value of $600,000 and gives an amount of 0.90 or an LVR of 90%. Lenders’ Mortgage Insurance would be payable and added on top of the loan.
With construction loans, the lender would also look at the build costs, and make sure they fit within industry metrics. If you are overpaying for the construction costs you could get a low bank valuation.
Crunching the numbers is key to successfully building a home in Brisbane.
Read More: Build a House in Brisbane 🏗 The Definitive Guide
How to calculate LVR for Refinance?
If you wish to refinance your own property, banks will do their own property valuation to figure out the loan to value ratio. Here’s why:
The value of your property will likely have changed since your initial purchase. As we’ve seen in the past couple of years, property prices can change dramatically. We’ve seen median property prices go up by just over 30% in the past 12 months. If prices go up, that means that your property will be worth more. Likewise, if the property market has gone down, then your property could be worth less than what you initially paid for it.
Renovations can be another reason for property values to change. Even minor renovations such as a fresh kitchen or bathroom can increase the value of your property by a significant amount.
The banks will use an independent valuer to assess the value of the property at the time of refinancing so they can accurately calculate your LVR.
Read More: 7 Reasons to Refinance your Home Loan
Does Your Property Need a Valuation?
You do not always need a bank valuation to determine LVR, but it depends on a few conditions.
Lenders do not value your property and will use the asset price mentioned in the contract of sale for determining the LVR if you fulfil the following conditions:
- ✅ The value of the loan is either equal to the 80% LVR or less
- ✅ You are buying a property
- ✅ Loan amount does not exceed $800,000
- ✅ You submitted complete evidence of your income
- ✅ The location of the property is either a regional centre or a capital city
- ✅ You bought the property by using the services of a licensed agent
- ✅ It is not a new property
- ✅ You do not have a relationship with the vendor (i.e. you are buying a property from a third party through a real estate agent)
What is the Maximum LVR Amount Allowed?
The amount of LVR banks allow you to borrow is based on factors such as:
- ✅ How much you are looking at borrowing
- ✅ The location of your house
- ✅ Your creditworthiness
- ✅ If you are applying for a home loan or an investment loan.
If you provide a complete set of documents, the maximum LVR amount you are allowed to borrow is 95% for purchases or up to 90% LVR for refinances. The banks regularly change their policy on how much they will allow as their maximum LVR, so talk to our team of experts to see what you can qualify for.
What is a High-Risk LVR?
If the loan amount is over 80% LVR, lenders consider it a higher risk. This is why in most cases you will need to have LMI if the loan value is more than 80% LVR. LMI protects the banks from any risks associated with you defaulting on your loan. The risk associated with your loan is not calculated purely on your LVR. There are other factors that they consider when assessing the risk level of your loan, such as your job.
People who work in certain professions (such as doctors, dentists, lawyers, and other medical professionals) can get a loan of up to 90% LVR with no LMI.
Read More: How to get no LMI and 90% LVR
Why do Banks Put a Cap on LVR?
Banks restrict LVR to manage the risk profile of their loan portfolio. If you default on your loan, the bank will need to repossess your home and attempt to sell it. As we saw with the global financial crisis in the USA from 2007 to 2009, loan portfolios with too many high-risk borrowers can expose them to catastrophic financial losses.
An LVR of 80% is considered a level that presents a lower risk, which removes the need for the banks to insure themselves against any losses that they would incur if your loan was to default.
There are some other reasons that banks will put a cap on your LVR:
if you are a high-risk borrower. For example, if you wish to purchase a property for $600,000 and apply for a home loan of $525,000, your LVR will be 87.5%. But you may only get approval for 80% LVR due to bad credit history. The bank may also reduce your LVR if it is not easy to sell your house.
Below are some of the reasons why banks put a cap on LVR:
- ⛔️ If you have a bad credit history
- ⛔️ If you buy a unique property
- ⛔️ It is situated in a remote area
- ⛔️ It is a serviced apartment run for example by Quest or Mantra, heritage-listed property, or it is a display home
- ⛔️ If it takes more than six months to sell a property
Our team at Hunter Galloway can help you gain a detailed understanding of LVR and will help you find the right lender.
The Hunter Galloway Mortgage Broker Brisbane team is here to help. We have a team of home loan experts.
Chat with us now on 1300 088 065 or get in touch with our team by clicking the button below for a free assessment.
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