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.