What’s-a-Loan-to-Value-Ratio-?

loan-to-Value-Ratio-is-one-of-those-things-you’ll-hear-about-a-lot-in-the-world-of-home-loans.-It’s-important-because-it-may-affect-your-borrowing-power.So-what-is-LVR?
Loan-to-Value-Ratio-(LVR)-is-how-lenders-describe-the-amount-you-need to-borrow-to-buy-a-particular-property.In-a-nutshell-it’s-the-amount-you-need-to-borrow,calculated-as-a-percentage-of-the property’s ‘lender-assessed-value’.
The‘lender-assessed-value’is-basically-your-lender’s-valuation-of-the-property.

Let’s-break-it down-a-bit-more. Here’s-an-example:
Let’s-say-your-lender-values-the-property-at $500,000
Let’s-also-say-you-have-a-$100,000-deposit
This-means-you-need-to-borrow-$400,000-to-buy-the-property.
Your-LVR-would-be-calculated-like-this:

$400,000÷$500,000=80%
In-the-above-example,we’ve-simplified-things-by-leaving-out-some-of-the-fees-and-costs-you-might-have-to-pay-but-more-about-those-later.
So-now-you-know-how-your-LVR-is-calculated.-So-far,so-good.But-what-does-it-mean-when-it-comes-to-your-borrowing-power?

Generally, the-lower-the-LVR, the-better
Why-is-a-low-LVR-considered-better?-From-the-lender’s-perspective,-a-lower-LVR-generally-carries-less-risk.
A-lower-LVR-may-also-be-good-news-because-you’ll-be-off-to-a-head-start-when-it-comes-to-owning-your-home.If-your-LVR-is-lower,you-will-have-more-equity-in-your-home-right-from the start.-(Equity-is-the-market-value-of-your property, minus-the-amount-of-your-loan-you-still-have-to-repay.)

What-happens-when-your-LVR-is-over-80%?
When-it-comes-to-LVR,80%-is-widely-considered-the-tipping-point.-As-soon-as-your-LVR-tips-over-80%,the-cost-of-getting-a-home-loan-may-start-to-increase.This-is-because-borrowers-with-a-LVR-of-over-80%-may-be-required-to-pay-for-Lenders-Mortgage-Insurance-(LMI).
LMI-protects-the-lender-if-you-default-on-your-home-loan-and-there’s-a-shortfall-following-the-sale-of-the-property.Even-though-you’ll-be-the-one-paying-the-insurance premium,LMI-won’t-provide-you-with-protection.-It-only-protects-the-lender.
Generally-speaking, the-higher-your-LVR,-the-more-LMI-will-cost.

You-need-to-make-sure-you-understand-LMI-before-deciding-if-it’s-a-good-idea-for-you.Everyone’s-circumstances-are-different,-so-learn-as-much-as-you-can-and-consider-the-alternatives.
Read-our-article-on-Lenders-Mortgage-Insurance-to-learn-more-about-‘LMI’,-‘shortfall’-and-the-possible-consequences.

A-word-about-fees-and-costs
There-are-a-few-upfront-fees-and-costs-you-may-have-to-pay-when-buying-a-house.If-you-haven’t-taken-these-costs-into-account,-you-may-end-up-having-less-money-left-for-your-deposit.The-less-you-have-for-your-deposit,the-higher-your-LVR-will-be.

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