Loan to value ratio

The loan to value ratio, abbreviated as LVR, simply represents your loan amount as a percentage of the value of the property. Lenders use it to assess risk. The lower the loan when compared to the property value, the lower the risk for the lender.

How is it calculated?

If you were to borrow $400k to purchase a $500k property, your LVR would be 80% (400k / 500k = 80%).

Those seeking to purchase a home also need to be mindful of how Government and lender costs affect their LVR.

For example, the total funds required to purchase a $500k property could increase to $520k after accounting for such costs. In that case, if a purchaser had $100k to put toward the purchase of the property, the remaining loan amount would be $420k. That would result in an LVR of 84% ($520k – $100k = $420k / $500k = 84%).

Additional costs for items such as pest inspections, unpaid rates on the property and a good lawyer to settle the purchase transaction could add another $5k, resulting in an LVR of 85%.

How does LVR impact on my home loan?

A higher LVR will impact the lender’s view of the loan. Lenders seek insurance when the LVR exceeds 80%, which adds an additional cost.

What’s LMI?

LMI stands for Lenders Mortgage Insurance. It’s often thought of as insurance for the borrower but it’s actually for the lender. LMI is designed to protect lenders from borrowers who default on their repayment obligations. Once the LVR goes above 80%, the borrower is required to pay for LMI. It’s a one-off cost at the time of applying and is generally added to your loan.

Here’s an example of how it works:

Let’s say the purchase price of a property is $500k.

Total fees and charges needed to complete the purchase are $20k.

So total funding requirements are therefore $520k.

If you had $100k to put towards the purchase, the resulting LVR would be 84% ($520k – $100k deposit = $420k bank loan required; $420k / $500k = LVR of 84%).

The lender presents you with a quote for LMI at $3,500 and will only provide funding if you pay it. Your loan then typically increases by that amount to $423,500.

The cost of LMI can vary from a few thousand to tens of thousands, depending on the lender, how much the LVR exceeds 80%, the size of the loan, the value of the property, and the insurance company providing the cover.

LMI will not apply if the borrower reduces the LVR to 80% by contributing a greater amount towards the purchase.

The decision to proceed with a “lower” deposit

While it may be possible to complete a purchase by obtaining a loan with a deposit of only 5% +costs, it’s important to consider the risks before doing so.

Even though a low deposit may get you into the market sooner, a loan with a high LVR could mean the lender applies tougher approval criteria, higher interest rates and additional application fees. These are all in addition to the cost of LMI.

Shroogle will estimate government costs, Lenders Mortgage Insurance and your Loan to Value Ratio as you work your way through the process.

Your Shroogle Home Loan Specialist will discuss issues like this when assisting you with your application.

 

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