Loan-to-Value Ratio (LVR) in mortgage is a key financial metric that calculates the percentage of a property's appraised value that a borrower can borrow from a lender.
It’s important to know about LVR and everything associated with it if you’re trying to get a mortgage in Australia.
In this guide, we’ll go through a detailed overview of LVR in mortgage, the standard formula to calculate it, how to get the ideal LVR, and more.
Let’s get started.
Keep in mind that the information in this article is general in nature and does not constitute financial advice. We suggest you seek professional guidance tailored to your individual circumstances.
LVR, or Loan-to-Value Ratio, is the percentage of the appraised value of the property you’re about to buy that can be financed as a loan through a bank.
Basically, a percentage of the total value of the property that a lender is willing to lend you.
A lower LVR generally indicates less risk for the lender, as it shows that the borrower has more equity in the property. An LVR of 80% or lower is preferred across Australia (but it may vary among lenders), which reduces the likelihood of default due to the fact that it keeps the repayments low.
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Banks usually conduct two levels of property valuation: market valuation and bank valuation.
Market valuation primarily assesses what a property would likely sell for in the current real estate market, considering factors such as location, condition, and comparable sales in the area.
It’s determined by real estate agents or independent appraisers who analyse recent transactions and economic conditions to arrive at a price that reflects market dynamics.
Bank valuation, however, tends to be more conservative. It focuses on the lender's perspective, ensuring that the property serves as adequate collateral for the loan amount you expect.
Your lender would have professional valuers acting according to their own criteria and guidelines. Oftentimes, bank valuations result in a valuation that is lower than the market value to help mitigate their risk by providing a safety net against potential declines in property value over time.
Lenders usually choose the lower valuation among the two.
The standard LVR formula is:
LVR = (Loan Amount ÷ Property Value) × 100
Let’s see an example. If your property value is $600,000 and your approved loan amount is $480,000, the LVR is:
LVR = ($480,000 ÷ $600,000) × 100 = 80%
LVR is a key factor for lenders in their lending decisions. 80% is the standard LVR threshold in Australia, but it’s worth noting that this may vary by lender.
That said, a borrower with a lower LVR has more equity in the property, which passes them as a lower risk.
This often results in a smoother approval process with favourable loan terms like:
Better interest rates.
Flexible repayment options.
Longer loan periods.
Access to specific loan products that are not available to higher LVR borrowers, etc.
Borrowers with 80%+ LVR (might vary by lender) are perceived as higher risk. To mitigate this, lenders will ask you to pay Lender’s Mortgage Insurance (LMI), which comes on top of the few other unfavourable loan terms.
When you’re getting a loan, going for a lower LVR is the ideal choice to get yourself more equity in the property, a lesser financial burden, and favourable loan terms.
According to research by the Australian research company, Roy Morgan, over 30% of Australian mortgage holders are at risk of mortgage stress, making it vital to ensure you make careful financial decisions.
So here are a few ways you can lower your LVR when getting a mortgage.
Your deposit directly affects your LVR.
If your LVR is 80%, you are required to bring in the remaining 20% as deposit. That means if you can afford a higher deposit, you can bring it in.
With this higher deposit, you’ll get a lower LVR.
Your next option is to consider a property with a lower purchase value. With a lower property value, the amount that adds up as LVR is also lower.
But you can bring it further down by using the deposit you had in the first place, which would be more in percentage now that you’re considering a less expensive property.
Anything below the minimum required deposit would require you to pay LMI.
If you don’t have this minimum deposit, you can use a family member as a guarantor. This will use their savings or property to help you meet the minimum deposit required, thereby avoiding LMI and lowering your LVR.
While the lender will most likely combine your deposit and your guarantor’s to meet the minimum requirement, it’s also possible to get a no-deposit mortgage in Australia with a guarantor.
Another option to avoid LMI and lower LVR is to consider the Home Guarantee Scheme (HGS) by the Australian government.
This scheme helps eligible home buyers purchase their property with a deposit as low as 2%. The rest of the deposit is guaranteed by the government to the lender.
In this case, you can pay a lower deposit, get a lower LVR, and avoid LMI.
LVR over the standard threshold attracts Lender’s Mortgage Insurance (LMI). That means you can get a higher LVR with a lower deposit by paying the LMI.
The higher your LVR goes, the lower your deposit gets.
But keep in mind that LMI is a hefty amount paid to protect the lender in case of default, and not you. You can either pay it fully upfront or add it to your loan. Adding LMI to the loan means you have to repay it over the course of months or years, which increases the interest rate.
However, some banks offer LMI waivers to teachers and other select professionals, which offers up to 90% LVR without LMI. Kindly consult with your lender or mortgage broker to verify your eligibility for this.
One of the major risks is negative equity.
Getting a mortgage with a high LVR means you have less equity in your property. This lack of equity can pose a substantial risk, particularly in a declining real estate market where property values may decrease.
In such a case where the market takes a downturn, you may find yourself in a situation where your mortgage balance surpasses the property’s value, leading to negative equity. This ultimately limits your options if you need to sell or refinance in the future.
Another risk is the stricter loan terms that come with high LVR loans.
You should expect to pay higher interest rates and higher monthly repayments. If not managed wisely, this could become a financial burden that could push you into mortgage stress!
If you’re getting a mortgage, it’s always ideal to keep your LVR under 80% to keep your financial responsibility on the easier side. Anything over this threshold comes at the risk of LMI, higher interest rates, and higher repayments.
While you do have the option to get a high LVR loan without LMI through various schemes, it’s not the ideal choice since it has a great chance of putting you in a financial burden.
We highly suggest that you consult a mortgage broker or financial advisor to make an informed decision.
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