The LVR or loan to value ratio is basically the amount you borrow. It 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. It also helps you decide whether you need to have lender mortgage insurance (LMI) or a low deposit premium on your home loan. Normally, you must have the LMI or a low deposit premium if a bank gives you a loan that is more than 80% of the property value.
Banks and other financial institutions always stress on the LVR when evaluating your loan application. The higher the loan to value ratio, the higher the risk is to the lender. Whereas, a lower LVR means the lender will have to bear a low risk.
How is Loan to Value Ratio Calculated?
The calculation of LVR is quite simple. Divide the loan value by actual purchase price or property value and multiply it by 100.
For example, if you are borrowing $300,000 and the property used for security purpose is worth $375,000. The LVR will be calculated as follows:
($300,000 loan ÷ $375,000 value of a property) x 100 = 80%
However, if the loan amount is 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.
You must know that lenders do not consider the price you pay for the property. Instead, they determine the value of a property through their own valuation. It is possible that the price determined by the valuer is different from the purchase price of a property.
How to Measure LVR for Refinance?
If you wish to refinance your own property, banks will do their own property valuation to figure out loan to value ratio. The reason is quite simple. You might have bought your house two or three years ago and its price is no longer relevant. It is also possible that you did the renovation, which changed the value of a property. In such cases, an independent valuation is a more reliable option.
Does Your Property Need a Valuation?
Lenders do not value your property and 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 property is either a regional centre or a capital city
- You bought a property by using the services of a licensed agent
- It is not a new property
- You do not have a relation with the vendor
What is the Maximum LVR Amount Allowed?
The amount of LVR, banks allow you to borrow, is based on factors, such as
- How much loan you took
- The location of your house
- Your credit worthiness
- The type of loan you sent an application for
If you provide a complete set of documents, the maximum LVR amount you are allowed to borrow is 80%. However, exceptional cases with strong applications have a chance to get a loan up to 90 to 95% LVR. On the other hand, if you are self-employed and do not have any evidence of income, you can get a loan up to 60% LVR.
What is a High-Risk LVR?
If the loan amount is over 80% LVR, lenders consider it high risk. This is why you need to have LMI if the loan value is more than 80% LVR. You can reduce the overall risk associated with the loan if you have LMI. It also allows banks to approve your loan without any risk of losing their investment.
Why do Banks Put a Cap on LVR?
Banks restrict 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 an 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 buy a unique property
- It is situated in a remote area
- It is a service apartment, 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. Chat to us now on 1300 088 065 or email Joshua Vecchio at Joshua.Vecchio@HunterGalloway.com.au