What is the Maximum Loan To Value in Australia?
If you’re looking into buying property, ‘“loan to value ratio” (LVR) is one of those pieces of jargon that you simply won’t be able to avoid. Unfortunately, this isn’t the kind of term that you can just gloss over; it’s crucial prospective buyers understand LVR before pushing on with a purchase.
Below, we run through everything you need to know about LVR, including how it affects your home loan repayments, the maximum LVR available to borrowers and key considerations for expats.
By the end of the article, you’ll have a new-found understanding of LVR and will hopefully feel ready to take that next big step in your property investment journey!
What is Loan to Value Ratio?
Loan to value ratio, usually abbreviated to LVR, shows how much money you’re borrowing from your lender when buying a property. LVR is expressed as a percentage of the property’s lender-assessed value, representing the value of your home loan proportional to the property’s value.
Let’s break this down with a quick example:
- Your lender values the property at $750,000
- Your deposit is $150,000
- You need to borrow the remaining $600,000 from your lender
You can calculate LVR using the following formula:
LVR = (Home loan value ÷ Property value) × 100
Applying this formula to the scenario above, the LVR can be calculated like so:
- 600,000 ÷ 150,000 = 0.8
- 0.8 × 100 = 80%
In a nutshell, your deposit covers 20% of the property value and your loan repayments service the remaining 80%.
Why is Loan to Value Important?
LVR is crucial for borrowers and lenders. From the borrower’s perspective, LVR can influence the cost of your mortgage repayments and directly affects your borrowing power. Lenders depend on LVR to assess risk in mortgage applications and offer loans only to applicants who are likely to be able to repay them.
Get a free Australian mortgage assessment today.
How Does LVR Affect My Mortgage Options?
For banks, the lower the LVR, the lower the risk. Opting for a low LVR plan, therefore, may open the door to more competitive home loan products with superior interest rates. You’ll also have strong equity in your property from the jump. The drawback is that you’ll need to pay far more money upfront on your deposit.
What is the Maximum Loan to Value Ratio in Australia?
Lenders set their own limits on maximum LVR. Most lenders offer LVR of up to 80%. Some lenders go beyond this, with LVRs of 90% or even 95%, meaning you would only need to pay a 5% deposit. However, in these cases, lenders usually charge Lenders Mortgage Insurance (LMI), which can cost tens of thousands of dollars.
Generally, 80% LVR is what property investors aim for on their home loans. This ratio makes the cost of the deposit fairly manageable for borrowers. For banks, 80% LVR represents just the right amount of risk in most situations; any higher, and LMI is likely to be charged on top.
What is Lenders Mortgage Insurance (LMI)?
LMI is a type of insurance you can expect to pay if your LVR is above 80%. The sole purpose of LMI is to protect the lender in the event you default on your home loan and the subsequent sale of the property by the lender doesn’t cover the debt.
How Much Does Lenders Mortgage Insurance (LMI) Cost in Australia?
The cost of LMI for borrowers varies from lender to lender. Generally, the higher the LVR, the higher the LMI. In Australia, your LMI could cost anywhere between $5,000 and $50,000. It’s usually paid upfront, but can also be paid in regular installments with your home loan.
Can You Get 100% Loan to Value Ratio in Australia?
It is possible to secure a 100% LVR home loan and avoid paying a deposit in Australia, but generally only with a guarantor. This is usually a family member, who must have good credit and equity in a property of their own.
The guarantor pledges cash or equity in their property as security; if you fail to meet your home loan repayments, they too are held responsible. This method for structuring a home loan can also help avoid LMI.
How is Your Loan to Value Ratio Calculated?
When submitting your home loan application, you get to decide your LVR. Whether the bank approves your application, however, is a completely different matter. If your lender identifies you as a high-risk borrower, for instance, they’re unlikely to accept an LVR higher than 70%.
How do Lenders Decide on an Appropriate LVR?
When assessing home loan applications, lenders perform a series of checks on the borrower to determine their serviceability (this just means your ability to meet regular repayments). The borrower generally has to consent to the following checks:
- Credit history
- Employment history
In addition to the borrower’s financial situation, lenders will also consider the property’s location. If the property is not in a desirable location—for instance, it’s extremely remote—then lenders will likely lower the LVR.
Finally, lenders take into account the home loan amount and type of loan you’re applying for. All of this information is synthesised and the lender draws up an LVR that meets their requirements.
What LVR Can I Apply For?
The LVR you can expect to receive on your home loan depends on the property and your financial situation. For example, if you’re in a strong financial position and can provide evidence of regular income, you can borrow 80% LVR, or even up to 95% LVR with LMI.
A lack of income documentation is likely to reduce your borrowing capacity. For instance, if you’re self-employed with no salary, lenders will be less inclined to offer a high LVR. However, as long as you can still provide evidence of regular income, this shouldn’t be a major problem.
Home loan applicants in a weak financial position, on the other hand, may only be able to borrow up to 70% LVR. If you can’t meet the high deposit costs that come with a lower LVR, you’ll need to consider saving up more money or paying LMI.
Get a free Australian mortgage assessment today.
The Importance of Mortgage Brokers
Ultimately, there’s no standard when it comes to LVR. Where one home loan is rejected, the very same application could be approved by another lender. For prospective buyers, it’s always best to contact a mortgage broker to help you find the best deals and improve your chances of having your application approved.
When is a High Loan to Value Ratio Best?
A high LVR is suitable for borrowers who are unable to pay large deposit costs upfront. Having a higher LVR essentially defers the payment you’d make on your deposit further down the line, therefore making it easier to initiate the property-purchase process.
However, a high LVR will likely extend the amount of time it takes to pay off your mortgage. It could also increase the cost of your home loan repayments as loans with a high LVR generally come with higher interest rates.
When is a Low Loan to Value Ratio Best?
A low LVR is suitable for borrowers who can afford to pay a sizeable deposit and want to access mortgage options with the best rates. A low LVR also allows investors to build strong equity on their property early on. This equity can then be used to make further investments.
For many investors, however, a low LVR simply isn’t feasible. Imagine you had a 60% LVR home loan on a property valued at $750,000. That would mean paying $300,000 upfront in deposit costs!
Do Loan to Value Ratios Differ for Expats?
There are stricter lending terms in Australia for foreign nationals and expats. However, it’s still possible to borrow up to 80%, or even 95% (with LMI), of the property’s value through select lenders as an expat, provided you’re in a strong financial position.
When Might Lenders Lower LVR For Expats?
There are a number of additional factors that lenders consider when lending to an expat. These include:
- Foreign currency
- Foreign tax rates
- Foreign debts
We explore each of the three factors in further detail below.
The currency you choose to pay in as an expat can influence the LVR you’re offered. Most Australian lenders have a list of acceptable foreign currencies for mortgage payments.
Generally, stable currencies from economically developed countries are accepted, no questions asked. These include but are not limited to:
- United States Dollar (USD)
- Euro (EUR)
- Great British Pound (GBP)
- Singapore Dollar (SGD)
- Hong Kong Dollar (HKD)
- New Zealand Dollar (NZD)
If you wish to pay in a currency belonging to a developing country, lenders may be less likely to approve your mortgage application. This is generally due to doubts about fluctuating exchange rates.
Foreign Tax Rates
When assessing your expat home loan application, some lenders will measure your income against Australian tax rates rather than the tax rate of the country you’re living in.
Given that Australian tax rates are among the highest in the world, this can make you appear less wealthy than you really are. This is especially true if you live in a country with low tax rates like Singapore or Hong Kong, or none at all as in the case of the UAE.
However, many lenders will use foreign tax rates to assess your income as an expat, therefore eliminating this problem. Make sure to keep detailed records of tax payments in your country of residence in the event you apply for a mortgage in Australia.
As with home loan applications for Australian residents, lenders will check your credit history in the country you live in for any signs of foreign debt. As you can probably guess, debt will work against you and may lead lenders to reduce the LVR they’re willing to offer.
How to Get the Best LVR as an Expat
Given the extra scrutiny that expats are subjected to in the lending process, it’s best to reach out to a mortgage broker who can guide you through the next steps. A registered mortgage broker like Odin Mortgage will be able to find you the best LVR based on your requirements.
Get a free Australian mortgage assessment today.
When it comes to LVR in Australia, 80% is invariably the magic number. However, it’s possible to land an LVR as high as 95%, or even 100%, though these rates bring extra hoops to jump through.
If you’re an expat, you’ll face more scrutiny from lenders. However, that shouldn’t stop you from being able to secure an 80% LVR mortgage on your next investment property—especially when you use a qualified mortgage broker to find the best deals on your behalf!
Odin Mortgage is the leading mortgage broker for Australian expats and foreign nationals looking to buy property in Australia. Our experts will connect you with the best LVR deals on the market and help you find the perfect home loan for your needs.