What Does LVR Mean?
Have you ever experienced a situation where you are applying for a home loan, and it seems like mortgage brokers and lenders are speaking a completely different language?
It is very likely that you have seen the acronym LVR before, as it is commonly used. The acronym LVR is short for loan to value ratio, which is a commonly used term in the finance industry.
Here’s what it means.
The Loan-to-Value Ratio (LVR) is a crucial factor to consider when determining how much you can borrow for buying a property, the amount of deposit you need to save, and your eligibility for specific mortgage products while working out your finances.
The easy way to understand how LVR works is the ratio of the amount of your loan to the assessed value of the property, as determined by the lender.
For example if you are considering the purchase of a property valued at $800,000, and you require a loan of $600,000, the resulting loan-to-value ratio (LVR) would be 75 per cent, as the loan amount is equivalent to 75 per cent of the property’s value.
($800,000/$600,000 equals 75 per cent).
The importance of LVR lies in the fact that the maximum LVR’s vary among different lenders and loan types and certain lenders impose a limit on lending up to a specific LVR for small or specific properties.
When it comes to financing, the majority of lenders are willing to finance up to 80 per cent LVR, and with Lenders’ Mortgage Insurance (LMI), even higher. However, Alternative documentation (also known as low doc loans) loans may be limited to 60 per cent LVR without LMI, so it’s important to consider all options.
More on LVR
In addition to the information previously provided, we have compiled a list of a few more things that you may find helpful in gaining a better understanding of LVR.
Understanding the correlation between LVR and risk is a helpful approach to comprehend LVR. As the percentage decreases, so does the risk involved, indicating that the lower the percentage, the lower the risk. A loan with a 20% LVR, also known as a loan-to-value ratio, is considered to be low risk due to the fact that it provides more equity in the property which, in turn, offers greater security to the lender.
Lenders typically provide a maximum LVR of 95-98%, and it is important to note that at these levels, lenders mortgage insurance may or may not be included in the LVR. It’s important to keep in mind that not many lenders are willing to go as high as this, as many opt out at 90%.
If there is any fluctuation in the value of your property, then the LVR will be impacted accordingly. In the event that the value of your property decreases and you refinance your loan, it is possible that you may need to obtain Lenders Mortgage Insurance. If you consider the extra cost of lenders mortgage insurance, it may not be worthwhile as it could outweigh the benefits of any possible cost savings.
If, on the other hand, your property value has gone up, you may have a greater amount of equity available to you. This could be beneficial if you are looking to obtain cash for a deposit on an investment property or to complete home renovations.
Having a clear understanding of the common mortgage jargon will be of great help to you as you navigate your financial journey.
If you require any help securing an affordable home loan or if you have any questions about LVR, we are here to assist you.
If you would like to get in touch with us, you have two options. You can call us directly at 02 9068 6644, or if you prefer, you can request a Free Consultation from us. Either way, we assure you that there will be no sales pitch involved.