Your loan to value ratio, or LVR or LTV, is a way for your lender to express how risky giving you a home loan is to them. The lower your LVR, the better your changes of being approved for a loan.
LVR’s are calculated by dividing the amount you wish to loan by the value of the property, times by 100. So, if you want to invest in a $400,000 property and want to borrow $200,000, your LVR is as follows:
LVR = (200,000 / 400,000) x 100
LVR = 0.5 x 100
LVR = 50%
The LVR is an important metric to keep an eye on. As noted previously, the higher your LVR the less likely you are to get a mortgage. If you borrow 100% of what you need to buy a property you are much more likely to default on the loan that someone who has paid a substantial deposit. Some lenders will refuse to issue loans that have a LVR higher than 80% for regular loans and as low as 60% for low doc loans.
However, a high LVR is a fact of life for many first time homebuyers. In these cases you may be asked to pay for Lenders Mortgage Insurance, or LMI. LMI is a once off payment that protects the lender in case you default on the loan. LMI don’t impact on interest rates and are calculated based on your LVR score and the size of the loan. In other words, the higher your LVR and the more you borrow the more expensive your LMI premium.
The LMI premium is usually deducted from the amount you have loaned, so if you borrow $400,000 and your premium is $3,000, expect to receive $397,000. Certain banks offer LMI capitalisation where the LMI premium is rolled into your home loan. In this case your loan will be $403,000.
Ultimately, below a certain point – usually about 80% – your LVR doesn’t really impact on your loan conditions too much. A high LVR does become a concern in the context of LMI, but LMI capitalisation is a tidy solution to the problem.
