Loan-to-value ratio (LVR) is the value of the property compared to the amount of borrowed money required to purchase it. It is expressed as a percentage and is used by financial institutions to assess loan applications. If you have a low LVR, a lender will consider your home loan lower-risk compared to someone with a high LVR.
It’s a good idea to keep track of your LVR while house hunting. It can show you the realistic price range your saved deposit can afford. A low LVR can also help you avoid hefty extra expenses, such as Lenders Mortgage Insurance (LMI).
Your loan options may also be affected by your LVR - some banks also have maximum LVR limits, and often high-risk LVR loans attract higher interest rates, which affects your ongoing home loan repayments.
The calculation is pretty simple. LVR is your home loan amount, divided by the lender's property valuation and multiplied by 100.
You're looking at buying a property worth $500,000. You have saved up a deposit of $100,000, so you need a home loan of $400,000. The calculation would be:
Your LVR would be 80%.
Lenders like an 80% LVR - that is, with a 20% upfront deposit. At 80% LVR, most lenders do not charge LMI, as the loan is considered low risk. Avoiding LMI can save you a significant amount of money.
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 amount upfront means they're at an increased risk of being unable to recover the full loan amount if the borrower defaults on the loan. Additionally, these higher-risk loans are often subject to higher interest rates and borrowers with high LVR are required to pay LMI.
Lenders will usually use a bank assessment, conducted by professional evaluators, to determine the value of your property for calculating LVR. The final figure might differ from what you get from the estimated market value of real estate agents, or the final property price. The bank valuation gives the lender an idea of how much they could get back from selling the property if the borrower doesn't pay back the loan.
When your final purchase price differs from the bank valuation, banks will use the lower amount between their valuation and the home's purchase price.
If you want the best home loan deal, 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 cheaper properties than you originally had in mind.