What is Loan to Value Ratio?
The Loan To Value Ratio, or LVR is the loan amount shown as a percentage of the value of the property being used as security for the loan. Lenders consider the LVR when assessing your loan application. The lower the LVR, the less chance there is that the Lender may lose money if they have to sell the property to recover their debt. A low LVR can also lead to Lenders offering better loan terms in relation to interest rates and fees to you.
If a property was valued at $500,000, and the loan against it was $375,000, the LVR is calculated as:
$375,000 / $500,000 x 100 = 75%.
The difference between the loan amount and value (25% in this example) is known as equity. It can also be the deposit contributed to a home purchase.
The LVR is calculated based on the value of a property. Sometimes this is different to the purchase price. The Lender will use the lower of the two. For example if you bought an apartment off the plan for $400,000, and when it has been built is valued at only $380,000, the LVR will be based on the $380,000. If the apartment was valued at $425,000 the LVR is still calculated on the purchase price of $400,000.
Factors that Lenders consider regarding the LVR include the type of property being offered as security, the property’s location, and are there any restrictions on the property such as being heritage listed, a serviced apartment, or a Builder’s display home. They want to be sure that the property won’t be difficult to sell if they have to recover your debt. Your personal financial position may also affect the maximum LVR that a Lender will offer, such as your employment, savings and credit history.
Typically, Lenders will lend to 80% of the value of a property, and up to 95% of the value if Lenders Mortgage Insurance is used. They won’t lend to 100% LVR without any additional security because the risk to them of losing money is too high. The equity in another property, or a Family Guarantee can be used to provide the security to allow the loan to be approved at 100% LVR.
Speak to us and we can show you options for reducing the LVR of your loan, or strategies to get a loan approved with a high LVR.