Loan to Value Ratios for First Home Buyers
Understanding LVR as a first homebuyer is vital to understanding your buying power and how much you need for a deposit
Loan to Value Ratio (LVR) is a common term in the home loan industry. It’s a relatively simple concept that helps you and a lender decide how risky it would be to lend you money.
It’s important that you can calculate your LVR, know what a high or low LVR means and understand how LVR affects your buying power.
What is LVR?
LVR compares the value of a property to the amount of money being borrowed to purchase it. Lenders use this calculation to determine your home loan amount as a percentage of the value of the property you’re buying.
How to calculate your LVR
Calculating LVR is easy. You need to know two things; the value of the property you’d like to purchase, and how much money you have for a deposit.
Say, for instance, you want to purchase a 3 bedroom house outside of Sydney. The average price you may expect to pay could be around $650,000 . If you had $65,000 to put towards a deposit, you would still need to borrow $585,000.
You can calculate the LVR by dividing the amount you need to borrow buy the property with the property’s value:
$585,000/ $650,000 = 90%
Putting down a $65,000 deposit on a $650,000 house would mean you don’t own 90% off the house initially. A simple rule is that the bigger your initial deposit, the less you will need to borrow and the lower your LVR will be.
Is a lower LVR better?
A common question is, ‘What’s a good LVR?’
There is no one-size-fits-all answer since everyone’s situation is different. In general an overall lower LVR is recommended, as borrowing more may lead to higher interest rates. That said, something to keep in mind when deciding how much to save for a deposit is Lenders Mortgage Insurance (LMI).
LVR and LMI
LMI is an insurance payment that you only have to pay if your deposit is less than 20% of the value of a property. This is designed to protect the lender.
Lenders might see you as a risk if your deposit is less than 20% of the property’s value — they have to assume that if you can’t save up more, then you might not be able to meet monthly mortgage repayments. LMI is basically the lender taking a precaution in the event that a payment default occurs by the customer.
If your deposit is more than 20%, then you may not have to pay LMI . Avoiding LMI could save you from paying more, but not everyone can afford to wait while they save for a larger deposit — some people may spend too long getting a larger deposit and miss out on their dream property.