Before plunging into the numbers and how much of a deposit you need to buy a piece of real estate, let’s start with the LVR part.
LVR translates to ‘loan-to-value ratio’, which means how much money you can borrow versus the value of the property being purchased.
This is a very important equation and will determine how much money you can borrow to buy a property, and whether or not you can purchase the property you want.
When you’re researching home loan products, most mortgages will list the LVR. This does vary from lender to lender, and loan to loan. The percentage of LVR will determine how much you need for a deposit.
In the case of a 90 per cent LVR home loan, the mortgage amount (what you borrow) is calculated as 90 per cent of the property’s value.
If you’re allowed to borrow up to 90 per cent of the sale price, you would need a deposit of at least 10 per cent of the property’s value to secure this type of loan.
Calculating the LVR of a home loan
An easy way of calculating LVR is to divide the purchase price of the property by 100 and then multiply that amount by the LVR.
Let’s say the property costs $1,000,000. If you divide by 100, the LVR would be $10,000; if you then multiplied by 90, you’d get $900,000.
Based on this calculation, you could deduce that you would need the difference between these two amounts ($100,000) as a deposit to qualify for the home loan. Of course, this figure doesn’t factor in associated purchase costs such as stamp duty and conveyancing.
This is only a guide, and not a hard and fast rule. Some lenders calculate the LVR based on a property’s valuation, not the purchase price.
The purchase (or listed) price of a property may differ from the property’s actual value. Where there’s a difference between these two figures, a lender or mortgage insurer may use the lower value.
It’s worth noting that not all lenders require a valuation of the property.
What type of property can I purchase with a 90% LVR home loan?
Most 90 per cent LVR home loans are available for owner-occupiers, investment purchases, debt consolidation and refinancing. When doing your research, the loan should outline what it can be used for.
Now that you know how to calculate a 90 per cent LVR home loan, and what you can buy, it’s worth knowing whether you qualify.
Am I eligible for a 90% LVR home loan?
You’ve found a property to buy, and have a 10 per cent deposit plus additional funds for purchase costs such as legal fees, stamp duty and pest and building inspections – but what’s your credit rating like?
Your lender may not grant you a home loan just because you have the deposit; a bad credit rating could impact whether or not your application is successful.
If you don’t know the health of your credit rating, there are companies that can provide a copy of your credit history either for free (which takes longer), or for a relatively small fee (which is quicker).
Another important factor to consider when applying for a mortgage is whether or not you have ‘genuine savings’.
Genuine savings is (generally) determined by the amount of cash you have in your bank account, and how long you’ve been saving.
For example, you might have saved the 10 per cent deposit over a period of years, which would be considered genuine savings. Or it might have been deposited recently by a family member, which might not be considered genuine savings.
It will come down to the lender’s discretion as to what it considers to be genuine savings.
Will I have to pay lender’s mortgage insurance?
One final factor that will impact the amount you need to borrow to purchase a property will be lender’s mortgage insurance (LMI).
LMI indemnifies the lender against any financial losses in the event you default on your home loan repayments.
It’s a one-off payment that is either paid by you as part of your deposit (thus increasing the amount you need for a deposit) or is added to the amount you borrow.
LMI is generally applied to home loans with LVRs of more than 80 per cent, though this is not always the case. The cost of LMI depends on the value of the property being purchased.
What are the benefits of a 90% LVR home loan?
The obvious benefit of a 90 per cent LVR home loan is the amount you can potentially borrow. It’s easier to save a 10 per cent deposit than a 20 per cent deposit.
Another benefit is that it might allow you to qualify for a mortgage at all – something that might not be possible if you had to take out a home loan with an LVR of 80 per cent.
And if you’re already a home-owner, being able to secure a 90 per cent LVR home loan could mean you get to purchase another (investment) property and start to grow a real estate portfolio.