The basics of the Loan-to-Value Ratio (LVR) in the Australian Mortgage Sector
We will discuss what LVR is, the uses of it and other issues surrounding LVR.
What is LVR?
The Loan-to-Value ratio (LVR or LTV) expresses the ratio of a loan amount to the actual purchase price or valuation of the property as a percentage. It determines the down payment required.
Australian lenders generally consider LVRs of 60% or below for no doc loans or low doc loans. On the other hand, LVRs of 80% or above are considered risky, and lenders’ mortgage insurance (LMI) may need to be paid for. LVRs as high as 95% are also available if the loan is mortgage-insured.
100% LVR (home buyers not required to pay a deposit) is also possible. Such risky loans are subject to strict requirements such as finding a guarantor (guarantor home loan), which will be discussed below.
Who uses LVR?
Banks and building societies use LVR to represent the ratio of the first mortgage line as the percentage of the entire appraised worth of the real property.
A property is typically determined by an appraiser or the arms-length transaction between the willing seller and willing buyer. In general, banks use the lesser of the appraised worth and purchase price when the property is purchased within one to two years.
The risk of default always comes before lending decisions, as a lender’s possibility of absorbing loss increases with the decrease in equity amount.
Qualification guidelines for certain mortgage programs in Australia become stricter as the LVR of a loan increase. Of course, borrowers of high LVR are required to purchase mortgage insurance for protecting lenders from default, which increases the cost of the mortgage.
In general, low LVRs carry with them lower rates for borrowers in the lower-risk category. Lenders could then focus on high-risk borrowers like those with:
- Low credit scores
- High debt-to-income ratios
- Previous late payments in mortgage history
- High loan amounts or cash-out requirements
- Insufficient reserves
- No income
Loans of high LVRs are understandably reserved for borrowers with high credit scores and satisfactory mortgage history. Only the most credit-worthy borrowers are privileged for full financing (or 100% LVR). Loans with LVRs higher than 100% are underwater mortgages.
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The proper calculation of the LVR might be complicated, yet note two important things: the loan amount and property value. Lenders in Australia give the main importance to the LVR while assessing the loan application. If the LVR is low, then the risk to the bank is also low.
Free assessment forms are easily found online to help you find out what your LVR means for your ability to borrow.
For example, your property costs $600,000 and you would like to borrow $480,000. LVR = ($480,000 ÷ $600,000) × 100% = 80%.
Purchase Or Valuation Price: Which One to Choose?
Australian Lenders and Mortgage Insurers
What if I am buying a property off of my family?
A favorable purchase occurs when you buy a property from your family at a discounted price.
Some lenders in the nation consider the valuation price rather than the purchase price to calculate the LVR when the contract of sale to purchase the property was signed more than 3 months before the date of application of your loan. Most lenders require a contract to be over a year.
For example, you bought a unit off the plan for $500,000. When you are close to settlement after a year, the valuation becomes $600,000. LVR would then likely be calculated using the latter price.
What’s good about a higher valuation is that a lower LMI premium may result, or even not required at all. While your perception of value may differ from that of the potential lender’s borrower, having a valuation done by various lenders would of course help you maximize your borrowing power
How do lenders calculate the LVR if I am refinancing my property?
Is my property always valued by lenders?
Not really. For properties being purchased that meet particular criteria, property valuation may not be required. A physical valuation is always more expensive and time-consuming than those automated and driven by valuation.
The method of valuation ultimately boils down to your LVR and the overall risk of your application. Refer to the section below regarding the criteria.
When will a Valuation be Required?
- LVR is equal to or less than 80%
- A loan is under $800,000
- Property is being purchased
- Complete proof of income provided
- Property located in a major regional center or capital city
- Property purchased via a certified real estate agent
- Property is not a new dwelling (off the plan or new building)
- Vendor not related to the potential borrower
What is the Maximum LVR that I can Go For?
- Home loan amount required
- Property location
- Credit history
- Loan type applied for
Can I borrow 100% LVR?
You will have to find a guarantor to support your loan application.
The guarantor can be your friend or family member with an ownership and equity in another property. A portion of his or her property is put up to secure the portion of the home loan being applied for.
A guarantor may no longer be required when you make additional repayments or the value of the property increases – the LVR would then be low enough for the Australian banks to accept it devoid of any extra security requirement.
If you do not find a guarantor, you can explore the no deposit home loan choices where you do not have to deposit what you have saved yourself.
What is LMI? When is it Relevant?
Lenders Mortgage Insurance (LMI) is applied to a high-risk home loan with an LVR greater than or equal to 80%. The LMI premium paid allows the mortgage insurer to charge the lender risk-free even if you defaulted on your mortgage.
However, if you are a low doc loan borrower who lacks essential documents to prove income and earnings, the lender takes a greater risk and the LMI required, in this case, is at least 60% of the property value.
Is my LVR considered “high-risk”?
As mentioned above, Australian lenders consider any loan with an LVR of over 80% high risk. An LMI is required for minimizing the loan-related risk so that the lender can approve the loan without the risk of losing money.
You can use an LMI calculator to estimate the premium you will have to pay when you are taking out a loan of more than 80% LVR.
Residential Vacant Property Or New Dwellings
Why is my LVR Restricted by the Bank?
- Difficult to sell
- Relatively unique
- With restrictions, e.g. serviced apartments, display homes, and heritage-listed properties
- Likely to take more than six months to sell
Use different tools online
All beginners to home loans are not aware of all the upfront fees and costs associated with the property investment. The less you have for the deposit, the higher the LVR will be. If you have not taken these costs into your account, then you may have less money left for deposit. You can access and use the savings calculator, home loan deposit calculator, and repayments calculator at any time you like to succeed in your approach for buying the home.
The savings calculator is designed to assist users to find how long it will take to save up for the first home. The home loan deposit calculator supports users to estimate how much they will have for a deposit after deducting the upfront costs. The repayments calculator is designed to let its users estimate what the home loan repayments could be.
You may have decided to buy a property and ensured the importance of properly applying for the home loan in Australia. You can read honest reviews of reliable home loan providers and take note of the pros and cons of different types of home loans.
Contact and discuss us experts in the LVR related issues at any time you like to enhance your approach for qualifying the home loan.
We are here to make the acquisition of your home easier, just as how simple the calculation of LVR ought to be.