Downsides Of Having A High LVR

Your loan-to-value ratio, or LVR for short, plays a key role in your home loan application. While having a high LVR isn’t the end of the world when it comes to buying a property, there are a few potential drawbacks that are worth being aware of.

What does LVR mean?

First things first, it can be helpful to know the meaning of LVR. Your LVR is a percentage figure that symbolises the amount of money you’ve borrowed compared to the value of your property. Banks and lenders use this figure when assessing your home loan to determine the level of risk you pose to them as a potential borrower. Most banks and lenders like to see an LVR of 80% or less to be considered low risk. That means you’ll need to save a deposit of at least 20% to hit the safe zone.

For many budding homeowners, saving a deposit of 20% is easier said than done. That said, just because you’ll potentially have a high LVR home loan, doesn’t mean you won’t be able to take out a mortgage. But, there are just a few downsides that come with having a high LVR loan.

Please note: With Unloan, your loan amount cannot exceed 80% of the value of the property you are financing.

Drawbacks of high LVR home loans

Even with a high LVR loan you’ll still be able to get into the property market, but there are a few key disadvantages that are worth considering before you take the plunge into property.

Lender’s mortgage insurance or a low deposit premium

Because high LVR home loans are considered high risk for lenders, they’ll often protect themselves by charging you an additional fee for lender’s mortgage insurance (LMI) or a low deposit premium (LDP). Both LMI and an LDP are one-off, non-transferable, non-refundable insurance premiums that are designed to protect your lender in the event you’re not able to keep up with your mortgage repayments. 

These extra charges can add thousands to your home loan, meaning you’ll be left with even more to pay at the end of the day. With a larger home loan balance, you’ll have to make bigger repayments on your home loan, so it’s important to run the numbers before you take out a larger loan to make sure you can afford to service it.

Higher interest rates

In addition to paying LMI or an LDP, some lenders also charge high LVR borrowers with a higher interest rate as another way to offset the additional risk. So, not only will you have a bigger mortgage, but you’ll also be paying more in terms of interest. 

If you’re keen to see what you potential loan repayments might look like, you can use a repayment calculator to do the math for you. 

Limited loan features and facilities

If you have a high LVR home loan, you might find that certain loan features and facilities aren’t available to you. From offset accounts and redraw facilities to the ability to make extra repayments towards your mortgage, your loan might just come with the bare minimum. 

These types of home loan features provide a range of benefits, from saving on interest charges to paying off your loan quicker. If you’re not able to take advantage of these types of features and facilities, your loan will likely be less flexible and it could take you longer to reach your financial goals. 

Limited home equity

When you have a smaller deposit, you essentially owe more money to your bank or lender. With a larger loan comes less home equity, which is the proportion of the property that you own outright. As you make mortgage repayments, you’ll chip away at your home loan and grow your equity, but it’s often slow going in those first few years as you compete with your interest charges. Alternatively, if your property appreciates or grows in value during the time you own it, the increase in value will contribute to your equity.

The amount of equity you have in your property is important when it comes time to refinance. If you still have a high LVR loan above 80%, you could be charged with another round of LMI or an LDP if you choose to move to a different lender. Your equity can also come in handy if you’d like to tap into this cash to renovate or buy an investment property.

Application scrutiny

Before handing over hundreds of thousands of dollars, banks and lenders like to do their due diligence to make sure you’ll be able to service a home loan. Your LVR is one of the key factors they’ll consider while assessing your loan application. If you have a high LVR, you’re often considered a higher risk, so your application could be subject to more scrutiny. 

Tips for increasing your LVR

If you’re keen to avoid the disadvantages that come with having a high LVR home loan, there are a few steps you can take to boost your deposit and lower your LVR:

• Save for a larger deposit,
• Buy a less expensive property,
• Consider a guarantor home loan,
• Explore government assistance programs, subsidies and grants, or
• Seek monetary help from your family towards your deposit.

There are some situations when you may be better off biting the bullet and jumping into the property market with a high LVR home loan. Nonetheless, it’s important to be aware of the drawbacks of a high LVR loan so you can make the best choice for your circumstances.

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Please note: This content has been created for educational purposes only. Unloan may not provide all features discussed. Visit our product page here to learn more about our home loan features.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.

Unloan is a division of Commonwealth Bank of Australia.

‍Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

‍Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

‍There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.