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Home loan terms: loan-to-value ratio

Home loan terms: loan-to-value ratio

Understanding home loan terms for those who are new to the Australian property market can be like learning the alphabet again. Make yourself familiar with the terms and purchasing a property will become that little bit easier. Let’s kick it off with loan-to-value ratios.

What is loan-to-value ratios?

Loan-to-value ratios are the percentage that you can borrow against the purchase price of property. They are also known as LVRs and are usually shown as a percentage. For instance, if the property you wanted to purchase was valued at $400,000 and the lender had a maximum loan-to-value ratio of 90 percent, then you can borrow up to $360,000 and will need to outlay a deposit of $40,000.

In October 2010, Mortgage House was one of the first lenders in the year to offer a home loan with an LVR of 105 percent LVR. This means that borrowers can receive 105 percent of the value of the property. For instance, if you wanted to purchase property valued at $300,000, you could borrow $315,000. These types of higher loan-to-value ratio loans are great because borrowers will not require any deposit and essentially will have more money left over to use towards fees or to buy furniture and items for the house.

This type of LVR was rare however, as the global financial crisis saw lenders tighten their belts significantly and reduce their loan-to-value ratios. But things are now on the up and up again with RateCity reporting in late 2013 that LVR’s are once again increasing with the share of buyers borrowing up to, or over, 90 percent of the property’s value, which is the highest loan-to-value ratios since 2009. 

Borrowers need to be aware however that not everyone can apply for these loans with higher loan-to-value ratios. They need to have a great credit record and show that they can meet repayments from previous loans and credit cards.

Also be aware that while these types of loans are attractive, there could be risks involved. Loans with higher loan-to-value ratios often have much higher interest rates as these types of loans can be seen as more of a higher risk to lenders. The reason for this is that deposits are used as a form of security against loans with lower loan-to-value ratios.

If you are in the market for a home loan and are considering a high loan-to-value ratio home loans, make sure you do your research and compare home loans online as you may be able to find yourself a better deal. Check out the table to the right which lists some low interest rate home loans currently available. Need to do the sums? Use the RateCity home loan repayment calculator.

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