Ultimate Guide to Loan to Value Ratio (LVR) in Australia

You'll come across a lot of confusing terms when you're buying property. But one term you don't want to skip over is the loan-to-value ratio (LVR).

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Home Ownership
by
Dawn Teh

You'll come across a lot of confusing terms when you're buying property.

But one term you don't want to skip over is the loan-to-value ratio (LVR).

Not only will it help you figure out whether you're likely to get approved for a home loan. It can even affect how much you'll be paying for your property!

Keep reading to find out everything you need to know about LVR so you can make the best decision about your property purchase.

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).

What is the loan-to-value ratio (LVR)?

LVR is the size of your loan, as a percentage of the property's value.

How do you calculate your loan-to-value ratio (LVR)?

The calculation is pretty simple. You take your loan amount and divide it by the lender's valuation of the property. Then, multiply it by 100.

So if you're looking at buying a property worth $500,000 and you need a $100,000 loan, your LVR would be 20%. In other words, you have 80% equity in your property.

If you're still having trouble determining your LVR, here's an LVR calculator.

How to calculate LVR

What does 80% LVR mean and what happens if you go over it?

80% LVR is the ideal ratio for lenders to approve a home loan. It shows the lender that you've built up enough of a deposit and makes your loan low-risk.

Home loan applications with an LVR above 80% are considered high-risk and are more likely to be declined.

To the lender receiving a smaller deposit, it means they're at an increased risk of being unable to recover the full loan amount if the borrower defaults on the loan.

That's why if you're over the 80% LVR, they need to reduce this risk by getting the borrower to pay lenders mortgage insurance (LMI).

This insurance allows the lender to make a claim if the borrower can't pay back the loan.

How is LMI calculated?

The LMI premium amount is determined by the property value and the size of your deposit.

It's an extra cost that you'll need to factor into your budget and can cost about $12,000 for a $500,000 home with a $50,000 deposit.

Having a smaller deposit might also affect you in the long run.

If the value of your property decreases, you may end up owing more money than the property is worth (known as negative equity). 

This would make selling your property or refinancing your loan more difficult. 

Why is the loan-to-value ratio (LVR) important?

Here are the top reasons why knowing your LVR is crucial:

Lenders use it to determine your loan's level of risk, and whether you need to pay lenders mortgage insurance (LMI)

Lenders use the LVR to assess how risky a loan is. A higher LVR means higher risk for the lender. 

To bring this risk down, the borrower has to purchase LMI.

Conversely, a low LVR signals less risk to the lender and increases your borrowing power.

Your LVR can affect your loan repayment amount and interest rates

Again, a high LVR means your home loan amount is higher and this brings greater risk to the lender.

On top of getting the borrower to pay LMI, they may want to further reduce this risk by charging higher interest rates and repayment amounts.

It helps with estimating what property prices you can afford

Now that you understand what the LVR is, you can use it to gauge what property purchase price you can afford and how much money you'll need to put down in order to get a loan without paying LMI.

How is the value of the property determined for LVR?

Lenders will usually use a bank valuation to determine the value of your property for calculating LVR.

Bank valuations are conducted by professional valuers. 

The final figure might be different from what you get from the estimated market value that real estate agents provide. 

The bank valuation gives the lender an idea of how much they'd be able to get back from selling the property if the borrower doesn't pay back the loan. 

What are the other costs of home buying to be aware of?

If you're considering going ahead with paying LMI, remember there are other costs to consider before you sign on the dotted line:

  • Stamp duty
  • Conveyancing and legal fees
  • Registration fees
  • Building and pest inspection
  • Application fees
  • Council and water rates

Some have estimated that all this could add up to $15,000+ for a $500,000 property. 

Are there low-deposit home loan options without LMI?

Guarantor Loan

A guarantor home loan is a type of mortgage that allows someone else (usually a closely-related family member) to guarantee part.

They do this by putting up part of their home equity as security for the loan.  

For example, if you can only come up with a 5% deposit, your guarantor might guarantee the remaining 15% to make up a 20% deposit. 

You're more likely to get your application approved and you won't have to pay LMI. 

However, it is important to note that the guarantor may lose whatever home equity they've pledged if the borrower defaults on the loan. 

Make use of government schemes 

The Australian government has several schemes available to home buyers to help you increase your borrowing power. 

Some of the key ones for first home buyers include

  1. First Home Guarantee (aka First Home Loan Deposit Scheme) — In this scheme, the government guarantees part of your house deposit.
  1. First Home Owner Grant (FHOG) — The government provides grants to first home buyers ranging from $10,000-$30,000. The amount varies by state although it is a national initiative. 
Rent-to-Own with OwnHome

At OwnHome, we have an alternative low-deposit pathway to homeownership. 

It's called rent-to-own and all you need is a 3% deposit to get started.

Here's how it works:

  1. We buy your ideal home. Your upfront cost is just a 3% deposit. 
  2. You rent and live in your home. But, part of your fortnightly payments also goes to a security deposit. Think of it like you're living in your home and building up your deposit at the same time. 
  3. Purchase your home from us after 2-7 years at a pre-agreed price. The security deposit you've accumulated can be used to offset your purchase price.

Interested to know more? Head over to our calculator to discover your buying power with OwnHome:

Discover Your Buying Power With OwnHome

Main Takeaway: Aim for an LVR of 80% or less. But, it's not a deal breaker

So if you want to get the best deal on your home loan, 80% or less is a good LVR to aim for. You'll avoid LMI and likely pay lower interest rates. 

If you want a lower LVR, you can either save a larger deposit or look at properties that are cheaper than what you originally had in mind.

But if neither of these is an option for you, don't give up just yet!

Speak to us at OwnHome if you want to explore rent-to-own which only requires a 3% deposit to get started.

Head over to our calculator to discover your buying power with OwnHome:

Discover Your Buying Power With OwnHome

FAQs: Loan-to-value ratio (LVR)

What is the maximum LVR a lender will accept?

The maximum LVR level on a home loan depends on the individual lender. They will look at factors like your loan amount, credit history (e.g. credit card debts), and the type of loan you're interested in.

What LVR do I need for an investment property?

Just like owner-occupied properties, you'll likely need a 20% deposit (80% LVR) to avoid paying LMI for investment properties. 

If you already own a property, you could use the equity in your current property as the deposit for your investment property. 

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