What Is LVR? Why Do I Need To Know? Why Is Loan To Value Ratio Important When Looking For A Home Loan?
LVR stands for Loan to Value Ratio. LVR is the amount of your loan divided by the value of your property. If your lender values a property at $500,000, and you need to borrow $400,000 to purchase it, the loan amount is 80 per cent of the property value; Your LVR is therefore 80%.
As a general rule, higher LVRs are considered riskier by lenders, while lower LVRs are less risky. A high LVR may mean that you may incur additional costs to borrow, or you may be unable to borrow at all depending on the circumstances.
What LVR Should I Aim for If I Am Purchasing or Refinancing?
As a general rule, most lenders like to see an LVR of under 80%. In other words, they prefer your loan to be less than 80% of the total value of the home. A small handful of lenders are happy with LVRs up to 85%.
If you are purchasing a new home worth $500,000, most lenders would prefer to lend a maximum of 80% or $400,000 against that property, which means ideally they’d like you to have a deposit of at least 20% or $100,000.
If you are refinancing an existing loan, the same rule applies.
If your home is valued by the bank at $500,000 (this is different from a Real Estate Agent’s valuation), your loan amount will usually need to be $400,000 or less.
If you do need to borrow more than 80%, this does not necessarily rule you out of getting a loan, however, you are likely to incur extra charges. See below for further details.
Why Are Loans with High LVRs Considered Risky by Lenders?
A low LVR means the property is worth significantly more than the loan on it.
This means that if a borrower is unable to meet their repayments, and the property has to be repossessed and sold by the lender, there is a very good chance the lender will be able to recover all the money owed to them. If the debt is too close to the total value of the property, there is a risk that the bank may not be able to recover all the money owed to them if the property needs to be sold at a loss, especially if house prices slump.
What If I Need to Borrow More Than 80% of the Property Value?
It’s a good idea to sit down with us early in your property search so we can help you set a budget and deposit savings goal. However, even with the best planning, it is increasingly difficult to save up a deposit of 20% in a market where many areas are seeing record high property prices.
Many people find themselves needing to borrow more than 80% of the property value in order to get a foot on the property ladder.
Some people are lucky enough to have family members who are willing to help them out with a deposit either via a gift or family guarantee. In most other cases, if you need to borrow more than 80% of the property value (or 85% with a handful of lenders), you will likely need to pay Lenders Mortgage Insurance (LMI).
If you wish to refinance an existing loan, and your loan exceeds 80% of the current property value, it’s important to talk to us to determine whether refinancing will be worthwhile.
In most cases, you will need to pay LMI and it may therefore be more cost-effective to wait until your LVR reaches 80% or below before attempting to refinance.
What is Lenders Mortgage Insurance (LMI)?
In simple terms, LMI is a type of insurance that protects the bank if you are unable to repay your loan and the property needs to be repossessed and sold for less than the amount still owing on the loan. LMI only protects the lender, not the borrower.
Most banks will require you to pay for LMI on loans about 80% LVR, and the cost can typically run to tens of thousands of dollars depending on how much you need to borrow. At NBS Home Loans, we can help you understand when LMI will be charged, and whether there are any options that would help you reduce or avoid this expense.
Are There Any Exceptions to Paying LMI If Borrowing More Than 80% LVR Without Any Family Assistance?
A handful of lenders will provide loans up to 85% LVR without charging LMI. Some banks offer no or low LMI loans to workers in certain professions, provided they meet certain criteria.
Additionally, from time to time, the Australian Government has offered schemes to allow some people to purchase property without bearing the cost of LMI. At NBS Home Loans, we’ll take the time to understand your particular situation and let you know if any of these schemes or offers may be available to you.
What Is the Maximum LVR I Can Borrow?
A handful of lenders will consider LVRs of up to 95% in very limited circumstances, however, it’s important to note that this is generally very costly. No lenders will consider residential loans of 100% LVR.
Is There Any Benefit to Having a Lower LVR?
In general, the lower the LVR, the lower the risk to the lender. Many lenders offer lower interest rates for loans with low LVRs due to the decreased risk.
For example, a loan with an LVR of 50% will often have a significantly lower rate than a loan with an 80% LVR. On the flip side, loans with LVRs over 80% often have significantly higher interest rates to reflect the additional risk to the lender, in addition to the extra costs of Lender’s Mortgage Insurance (LMI).
Additionally, many lenders impose LVR limits on certain properties, postcodes or borrowers that they consider higher risk. This could be due to the primary income source of the borrower, remote or rural location of the property, the size or uniqueness of the property, property use, or other characteristics such as bushfire or flood risk, proximity to power lines, and so on.
In some cases, the allowable LVR can be significantly lower than 80% and LMI is not available, so a very low LVR is required to purchase in these situations.
Thanks For Recommending NBS Home Loans!
As a small business, we rely largely on word of mouth referrals. In fact, around 70% of the new clients we see each year were referred to NBS Home Loans by our existing clients.
If you have an existing loan with NBS Home Loans and you refer a new friend or family member to us, and your friend or family member successfully settles a loan of $250,000 or more with us by 31 January 2022, we’ll send you a $500 gift card to say thanks for the referral. (Additional conditions apply, including a limit of one gift card per referrer per new client, so please contact us for more info.)
WHAT OUR CLIENTS ARE SAYING
“Marty went beyong his role in helping us to get our Mortgage across the line during COVID in August 2020. He was 100% accurate with his assessment of the borrowing power and gave us the best options to suit our needs. If you wnt an honest Broker who cares for his customers, dont go looking anywhere else.“
Financial Hardship Resources And Contacts
We understand this is a difficult time for many of our clients, friends and family. We have compiled the below list of financial hardship contacts and resources for anyone who may find them helpful.
Lenders’ Hardship Contacts
For additional information and to be directed to the relevant section of each lender’s website, please visit this page on our website: https://www.nbshomeloans.com.au/financial-resources-hardship-contacts-covid-19-australia
ANZ: 1800 351 548
Bank of China: 1800 095566
Bank of Queensland: 1800 079 866 or CustomerAssistanceTeam@boq.com.au
Bankwest: 1300 787 144
Bluestone: 13 25 83
CBA: 1300 720 814 or customerassist@cba.com.au
Connective HL: 1300 543 558
Connective Solutions: 13 73 77
ING: 1300 349 166
Latrobe: 13 80 10 or hardshipassist@latrobefinancial.com.au
Macquarie: 1300 363 330
ME Bank: 13 15 63
MyState: 138 001
NAB: 1800 701 599
Pepper: 1800 356 383
St George: 1300 303 110
Suncorp: 1800 225 223
Virgin Money: 1800 701 997
Westpac: 1800 067 497
Additional Support Resources
Lifeline: 13 11 14
Suicide Call Back Service: 1300 659 467
Beyond Blue: 1300 224 636
Mental Health Line: 1800 011 511
Kids Helpline: 1800 551 800
MensLine Australia: 1300 789 978
GriefLine: 1300 845 745