It is important to understand all the terms relating to your loan. One of the many acronyms bandied about is ‘LVR’, which stands for ‘Loan to Value Ratio’. Here’s what it means.
What is LVR?
In the simplest terms, the LVR is the percentage of the loan against the value of the property. It is how much loan you have divided by the market value of your house.
So, if the property you want to purchase is valued at $1,000,000, and you need to borrow $800,000, the LVR is 80%. If you have a loan balance of $400,000 and your property is now worth $800,000, the LVR is 50%.
LVR determines the type of property you can buy
LVR is important because different lenders and loan types have different maximum LVRs and some lenders will only lend up to a certain LVR for apartments and postcodes or suburbs. Most apartments, especially in high density developments have a 70% to 80% LVR restrictions. A few banks can lend up to a 90% LVR for apartments. There are postcodes and suburbs in which banks will only go up to 80%. If you’re buying a fully detached house, chances are you can go up to 95% LVR.
Interest rates vary depending on LVR
The sweet spot for most banks is an 80% LVR. Most banks provide a competitive rate at this LVR. If your LVR goes up to 90% to 95%, there is a half percent difference in the interest rate. Let’s say the rate for an 80% LVR is 2.50%. Once the LVR goes up to 95%, that rate can easily go up to 3%. If the LVR is at 70% or below, then you may get a further interest rate discount from the lender i.e. a .10% discount.
Owner occupied or investment?
Banks can lend up to a 95% loan to value ratio if you’re purchasing a home to live in. For investment loans, most banks can only go up to 90% loan to value ratio. For construction loans, most banks can only go up to 90% LVR.
Most lenders will finance 80% LVR, or higher with Lenders Mortgage Insurance (LMI), while low documentation loans may be limited to 60% LVR without LMI.
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save, and whether you are eligible for a particular mortgage product, the LVR is one of the most important considerations.
We’ve created a video to help you understand Loan to Value Ratio. You can watch the video here.
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To find out if you’re ready to buy your first home, speak to a Maverick Finance Broker who’ll be able to walk you through the process. As always, all of us at Maverick Finance are here to support you on your property journey. You can get in touch with us by calling 0430 144 008 or send us an email to firstname.lastname@example.org, or simply leave your contact details and we’ll call you back. You can also book a complimentary meeting with us at calendly.com/maverickfinance.
This article is for general information only and should not be considered personal financial advice. Before making a financial decision, you should seek independent advice from a mortgage broker, financial planner or an accountant.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans and loan protection. She has offices in Sydney, Melbourne and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at email@example.com.