LVR is an acronym you’ll see a lot in property news, reports and documents and is used throughout the property industry.
But what does it mean?
LVR = Loan to Value Ration.
It’s also seen as LTV Ratio – Loan to Value Ratio.
What is LVR?
LVR is the proportion of money you borrow (loan) compared to the value of the property.
Finance lenders will examine your LVR before agreeing to give you the money needed to purchase your property as a way to assess your risk as a borrower.
The higher your LVR, the most of a risk you are.
To calculate your LVR your lender will divide the value of the property (the purchase price) by your deposit to ascertain the the amount of money you need to borrow (the loan value).
eg. If you are buying a property which is $500,000 and you have a $100,000 deposit (20%), you would need to borrow $400,000 and your LVR would be 80%.
400,000 ÷ 500,000 = 0.8
0.8 x 10 = 80, which makes your LVR 80%.
An LVR over 80% usually indicates a deposit under 20%, which most likely means you’ll need to pay extra to secure your loan – this payment is called LMI – Lenders Mortgage Insurance.
Home loans with over 80-90% loan to value ratio (LVR) are considered quite dangerous.
The danger with a 90% home loan for a lender is that your monthly repayments and loan terms are higher than they would be if you had a 20% deposit, or more. For this reason LMI is usually charged.
Here are a few things you need to keep in mind if you have a higher LVR:
Guarantor home loans
- A family member, usually your parents, agree to use their property as a security for your loan.
- Your guarantor will also be held liable if you default on the loan.
- If you’re prepared to mix finances and family, make sure you are aware of how you and your guarantor’s financial position can be affected.
Low deposit home loans
- Most lenders – even the big banks – only require a 5% deposit. But these types of home loans will have bigger repayments because you’re borrowing more.
- You will also incur LMI and you will be adding more stamp duty costs.
- A good idea is to also have extra funds to act as an emergency buffer in case interest rates rise again.
- As a rule of thumb, always prepare for interest rate rises of 2-3%
Long term mortgages
- Typically, a long-term mortgage is considered to be more than 30 years.
- May seem appealing because you have lower repayments
- Reality is you end up paying more because of the length of the mortgage
- Eg. If you borrowed $400,000 on a 40-year mortgage, you would pay $193,000 extra in interest than you would with the same loan but on a 30-year term (based on a 6% rate).
Whenever you’re borrowing money to purchase or refinance a home, it’s always a good idea to proceed with caution and consider the danger you pose to yourself and your family. Always compare home loans and understand all the pros and cons of the type of mortgage you choose.
Original article published on www.realestate.com.au/blog by Holly Jones 7/11/2013