If you're looking for a mortgage, chances are you've heard the term LVR thrown around. It stands for Loan to Value Ratio, and it represents the percentage of money you borrow for your home loan, in comparison with the value of the property.
Lenders use LVR to assess the risk of your loan, and will calculate it before deciding whether to lend to you - the higher the LVR, the riskier the loan.
Calculating LVR
To calculate the LVR, your lender will look at the value of the property you want to buy, and the size of your deposit to determine how much you'll need to borrow. Then, they subtract your deposit from the purchase price, and divide the rest by the property value.
Say you want to buy a $400,000 property, and have a deposit of $100,000. You need to borrow $300,000. Because the $300,000 is exactly three-quarters of the property's price, your LVR would be 75%.
What is a good LVR?
Generally speaking, an LVR of 80% or lower is ideal for borrowers, anything over 80% means lenders will have to mitigate their risk by purchasing insurance called Lenders Mortgage Insurance to protect themselves. A higher LVR can also mean you'll have larger monthly repayments, so its essential you think about if you can afford the repayments in the long term, or if interest rates rise etc.
Can you reduce your LVR?
Other than putting down a larger deposit, another way to reduce your LVR is by using a guarantor. A guarantor can put forward a security for the home loan by offering the equity saved in their property. For example, parents are increasingly becoming guarantors for their children. There are risks associated with this; for instance, if the borrower can't meet their repayments, the guarantor must repay the money. And if they cannot, the default could appear on their credit report.
We know the home loan process can be overwhelming, so if you have more questions, reach out to us today!
