The Basics of the Loan to Value Ratio (LVR) in Australia
Your Loan to Value ratio (LVR) is simple to calculate. You divide the mortgage amount by the appraised property value and express the answer as a percentage. Easy. Getting a favourable ratio matters a great deal as it plays a substantial role in deciding whether your home loan gets approved, what rates are available, and whether or not Lenders Mortgage Insurance (LMI) is payable. Sounds somewhat complicated, but don’t worry – we are here to help you understand all these things so you can confidently move forward with your mortgage journey.
What is an LVR?
The LVR is a common term in the mortgage industry. It is a calculation which determines the deposit required for a purchase or how much equity you currently hold in your property.
The LVR expresses the ratio of a loan amount to the actual purchase price or valuation of your property as a percentage. Essentially, the lower your LVR, the larger your deposit has to be or the lower your LVR, the greater the equity you have in your property.
Lenders in Australia place a heavy emphasis on the LVR when assessing your loan application. Borrowers with an LVR of 80% or below will have a higher chance of getting an approval and will likely get a better interest rate.
Borrowers with LVRs of 80% or above are considered higher risk to the lender, and Lenders’ Mortgage Insurance (LMI) may need to be paid to protect lenders from a potential default, which increases the cost of the mortgage. With that being said, LVRs as high as 95% are available given the loan will be mortgage insured. We explain more about Lenders Mortgage Insurance here.
It is also possible for a borrower to have an LVR of 100% or above (no deposit required). If you do not have enough savings, this is an option as long as you have a security guarantor who is a parent or close relative (subject to lender) who is able to offer you a property to use as security.
In general, low LVR loans carry with them lower rates for borrowers as they are in the low-risk category. A higher LVR loan will typically attract slightly higher rates. It’s also important to point out that despite this, lenders are still happy to consider higher-risk borrowers such as those with:
- Low credit scores
- High debt-to-income ratios
- Previous late payments in mortgage history
- High loan amounts or cash-out requirements
- Insufficient savings
- No income
Let’s say, your property costs $600,000 and you would like to borrow $480,000. Your LVR would be: ($480,000 ÷ $600,000) × 100% = 80%.
As mentioned previously, the lower the LVR, the higher the chance that the loan will be approved from a lower risk standpoint. The interest rate is likely to be lower also.
Here’s another example.
Your property costs $600,000 but now, you only intend to borrow $300,000. Your LVR would be ($300,000 ÷ $600,000) × 100% = 50%, significantly lower than 80%. By increasing the amount of money you put in, the LVR could effectively be lowered.
Basic LVR Formula
The main factors that impact LVR ratios are the amount of the deposit you put in, purchase price, and the appraised value of a property.
A property value is typically determined by an appraiser or valuer, or the unconditional arms-length transaction between the vendor and purchaser.
In general, banks use the lesser of the appraised value and purchase price when the property is purchased.
Which One to Choose: Purchase Price Or Valuation Price
You may wonder how the LVR is calculated when the purchase price and valuation price is different. Here are a few notes that might address the questions you have in mind and clear things up for you:
- Australian Lenders and Mortgage Insurers
Lenders and insurers use either the purchase price or the valuation price, whichever is lower, when determining the LVR. This situation is common in off the plan purchases as the value of the property may have changed from the date of which the contract was signed. It is also common in a hot market when competition is fierce and pushes the sale price higher.
Some lenders 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.
For example, if you bought a unit off-the-plan for $500,000. When you are close to settlement and some time has passed since initial signing, the valuation becomes $600,000. The LVR would then likely be calculated using the latter price.
What’s good about a higher valuation is that you will not be required to pay as high LMI premium (if LMI was payable in the first place), or you might not even need to pay for any at all, which is why having a valuation done close to settlement could help you maximise your borrowing power and get a better deal.
- What if I am buying a property from my family?
You generally still have to pay stamp duty on the market value of your property and potentially capital gains tax (CGT) as well. It is important to know the proper way to transfer property within your family and to avoid being charged hefty fees when thinking about any kind of property transfer (we can help you with that!)
- How do lenders calculate the LVR if I am refinancing my property?
The lenders’ valuation of your property will be used to calculate the LVR. Your actual purchase price may become irrelevant as you have likely purchased your property some time ago and possibly even renovated or added value to the property. The purchase price may also become irrelevant if there are house price fluctuations.
- Is my property always valued by lenders?
Not always. 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 the ones that are automated.
The method of valuation ultimately comes 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?
Some Australian lenders do not need a property to be valued when it meets certain criteria. They may adopt the actual price for calculating the LVR instead in the following situations:
- LVR is equal to or less than 80%
- Loan is under $800,000
- Property is being purchased
- Property located in a major regional centre 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 potential borrower
Get a free Australian mortgage assessment today.
What is the Maximum LVR that I can Go For?
The maximum LVR that the Australian banks let you borrow depends on:
- Home loan amount required
- Property location
- Credit history
- Loan type applied for
Most lenders require borrowers with high LVRs (>80%) to be Australian citizens, which means that the maximum LVR for foreign nationals is 60% – 80%.
Non-residents who wish to buy property in Australia must apply to the Foreign Investment Review Board (FIRB) for approval and are only allowed to buy certain types of housing.
Lenders tend to implement stricter regulations on non-residents. Loans for foreigners also typically have substantially higher interest rates than regular loans.
Can I borrow 100% LVR?
There are three ways you could borrow 100% LVR (or somewhere close to 100%).
Method 1 – Family Guarantor home loan
This method doesn’t require you to have any existing properties. You will have to find a guarantor to support your loan application.
The guarantor can be a family member or a close relative (depending on the lender’s policy) with sufficient equity in their property. The guarantor does not help you repay your loans but uses a portion of their property to secure a portion of the home loan being applied for.
The guarantor’s security doesn’t cover the entire loan amount, just a portion of it. This is usually the amount needed to reduce your LVR to 80%. In this case, you will not have to pay Lenders Mortgage Insurance.
Note that a guarantor may not be required (and removed) when you make additional repayments or when the value of the property increases. The LVR would then be low enough for the banks to accept it devoid of guarantors security requirements.
Method 2 – Releasing Equity (Top-up/cash out) from an existing property
If you have an existing Australian property, you can offer that property as additional security and the bank will allow you to borrow against that property up to 80% of its value.
- You have an existing property worth $500,000 with a current loan balance of $150,000.
- The bank will allow you to borrow up to 80% of the value so a maximum potential loan of $400,000.
- You top up your loan from $150,000 to $400,000 which is a $250,000 cash out or equity which you then take and pay for the remainder of the first purchase
Method 3 – Lender’s Mortgage Insurance (LMI)
You can borrow up to 95% of the property’s value by paying LMI to the bank. If you borrow 80% or lower, there is typically no LMI fee payable.
If you borrow 90%, the LMI fee would be approximately 2 – 3% of the property value and gets added on top of the loan amount.
In the case of the $1,000,000 purchase, you could borrow $900,000 by adding a $20,000 – 30,000 LMI fee on top of your loan. So your total loan amount would be $920,000 – 930,000.
Paying LMI is only something we’d recommend if you can’t do the first two methods, you don’t have sufficient savings/deposit, and you want to enter the property market sooner rather than later.
What is LMI? When is it Relevant?
Lenders Mortgage Insurance (LMI) is a lump sum, the one-off payment you pay to the lender in case you default on your mortgage and the property sells for an amount that’s less than the value of the mortgage.
Although the property itself serves as security for the loan, after taking all the additional costs into account, the amount that the property sells for may not be sufficient to cover the debt. In this case, lenders would recover the shortfall (ie: the difference between the property price and the size of the mortgage).
We can’t tell you how much you will have to pay for the insurance as different lenders have different policies, but as a rule of thumb, the higher the percentage of the loan you take out (as compared to the value of the property), the more you will have to pay. Most lenders require you to pay LMI when they lend more than 80% of the value of the property.
There are a couple ways you could get a loan with a reduced LMI:
- get a guarantor
- capitalise the cost of LMI (ie: add the cost of LMI onto the principal of the loan)
- save a bigger deposit
As always, talk to us at Odin Mortgage so we can help you save the most money!
Get a free Australian mortgage assessment today.
Is my LVR considered “high-risk”?
Australian lenders consider any loan with an LVR of over 80% high risk. LMI is required for minimising 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.
Why is my LVR Restricted by the Bank?
Australian banks use the LVR to manage the risk of the loan applications received from potential borrowers. They put a cap on the maximum LVR when the borrower is a high-risk one in order to reduce the risk of the home loan.
Even if you have obtained pre-approval for a loan of a certain LVR, you may only be approved with a substantially lower LVR if the property is:
- Difficult to sell – likely to take six months+
- Remote location
- Relatively unique
- With restrictions, e.g. serviced apartments, display homes and heritage-listed properties
Use different tools online!
Most beginners to home loans are not aware of all the upfront fees and costs associated with property investment. If you have not taken these costs into account, then you may have less money left for deposit. You can access our savings calculator, home loan deposit calculator, and repayments calculator below to ensure you are well prepared in your home loan journey.
The savings calculator is designed to help you find out how long it will take to save for your home.
The home loan deposit calculator helps you work out how much deposit you will have after deducting the upfront costs.
The stamp duty calculator helps you calculate the amount of tax charged by the Australian State and Territory Governments.
Ready to purchase a property in Australia but not sure where to start?
Contact us for a free consultation on all mortgage matters. Just tell us about yourself, your plans and your finances, and we’ll give you real numbers and interest rates – not just our best guess. We are here to help you buy a home.