| What is L.V.R. and Why is it Important?
L.V.R. stands for loan-to-value ratio.
Why is L.V.R. important? – There are a great number of factors taken into account when lenders are assessing your home loan application. L.V.R. is one of the important ones. The higher your deposit, the lower the L.V.R. This means the higher the security for the lender.
A lower L.V.R. will therefore give you a better chance of getting approved, although there are many other factors at play in the approval process).
L.V.R. is also used to determine whether you will need to pay for Lender’s Mortgage Insurance (L.M.I.). As a general rule you will need to pay Lender’s Mortgage Insurance if your home loan has an L.V.R. higher than 80% (Meaning a deposit of less than 20%).
Lender’s Mortgage Insurance is often quite expensive and may be a cost you will want to avoid if possible.
Some lenders may have different L.V.R. caps depending on the suburb in which a property is located. This is due to the different risk profiles of different suburbs. Make sure you check with your lender so you know exactly what deposit is required..
Lenders will have varying Loan to Value Ratios and may require a reduced L.V.R. (larger deposit) depending on your financial position, your credit history, your home loan amount, the location of your property, and the type of loan you are applying for.
Note that a lender will value a property and decide how much it is prepared to loan you based on its own valuation, not the advertised purchase price, which may be different.
Market value or Bank value?
Regularly, “market value” of a property is different from a bank valuation performed by a lender. Market values are used only as an indication of what the property might sell for – A bank valuation reflects longer-term sales history and what the lender expects to recover from the sale of the property if you default on the mortgage. So bank valuations are more conservative than the market valuations, because it lowers the risk of the loan for the lender.
If your bank valuation comes up short of what you paid for the property, the lender may ask you to make up the difference to mitigate the lender’s risk.
You can easily calculate your L.V.R. ratio.
Divide the total mortgage loan amount into the total purchase price of the home. (Eg: a home with a purchase price of $500k with a $100k deposit and a total mortgage loan for $400,000 results in a L.V.R. ratio of 80%.