When you’re buying your first home, you may come across various mortgage-related terms that are new to you – with LVR being one of them.
LVR stands for loan-to-value ratio, which is the ratio of how much you are borrowing compared to the value of the property you are purchasing, expressed as a percentage.
The LVR is calculated by dividing the borrow amount by the property value and multiplying it by 100 to arrive at a percentage.
For example, if you wish to borrow $400,000 and the property is valued at $500,000, your LVR would be calculated as follows:
$400,000 ÷ $500,000 x 100 = 80%
Generally speaking, the lower the LVR, the lower the risk to the lender, due to the borrower providing more security on the loan. Most mortgage lenders prefer borrowers to pay an upfront deposit of at least 20 per cent of the property value, which equates to an LVR of 80 per cent.
If you have saved a deposit of less than 20 per cent, it’s likely the lender will require you to pay for Lender’s Mortgage Insurance (LMI). LMI is an insurance policy that covers the lender in the event that you default on your mortgage.
LMI can be a significant additional cost in the home buying process, so it’s important to factor it into your budgeting if applicable. Consider using RateCity’s LMI Calculator, which can provide you with an estimate of your LMI payment.
If you are a first home buyer, you may be eligible for the Australian Government’s First Home Loan Deposit Scheme (FHLDS). The FHLDS allows eligible first home buyers to purchase a property with a deposit of as low as 5 per cent, while avoiding the cost of LMI. Instead, the loan (offered by a participating lender) is guaranteed by the National Housing Finance and Investment Corporation (NHFIC).
Does your LVR change over time?
As you work towards paying down your home loan principal, your LVR will tend to change. Assuming the value of your house remains the same or increases over time, you should see your LVR gradually reduce, and your equity grow.
This can be beneficial when you look at refinancing your home loan, as lenders typically offer lower interest rates for lower LVRs. However, it’s important to be mindful that if you refinance with an LVR above 80 per cent, you may again be required to pay LMI to your new lender – a cost which could outweigh the benefits of refinancing.