Loan to Value Ratio (LVR) - Jessica Arabia, Finance Prospect

July 03, 2018

Loan to Value Ratio otherwise known as LVR is a numerical figure that outlines how much a lender is comfortably willing to loan you against the total value of the property you plan to buy or in some cases refinance. This method is calculated by dividing the amount of the home loan with the purchase price, or in some cases the valuation estimate of the property.

The LVR is used by lenders to calculate how much risk is involved when considering loaning you money for the desired property asset. The LVR is the way of working out the true financial value of a property, and decides whether the home loan being considered needs to be covered by Lenders Mortgage Insurance (LMI) or not. For conventional property purchases LMI is payable if your total LVR is above 80%. This is a one-off insurance premium payable per lender, per settlement and is in place to protect the lender should you default on your home loan.

The higher the LVR is the higher the risk is involved that the lender will not be paid if you default on the loan and they have to sell the property. Having a high LVR will also affect your ability to refinance your loan later on and if you change lenders during this time you will be up for LMI again if the LVR on the new loan is above 80% LVR.

In some cases your LVR is a tool lenders use to work out the final interest rate they can offer you for your home loan. If your LVR is more than 80%, you will more than likely be charged a higher interest rate than a borrower with a lower LVR say at 70% as they are not as high risk as you are. This could make a big difference to your repayments, so it is important to pay down as much as you can afford to reduce the size of your loan and try to get your LVR under 80%, if you talk to an experienced mortgage broker they will be able to advise you of your options.

You must take into account that the value of a property is determined by an independent valuation report carried out by an independent valuer and not the price either yourself or someone has paid for the property or alternatively what you or someone else thinks the property is worth. There have been many cases where there has been a difference between the valuer's price and the purchase price, this can in some cases be contested but research and proof will need to be carried out and provided to support your claim.

If you have any queries or a question regarding specific information around LVR’s or loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more about the options available to you.