How to Calculate Loan-To-Value Ratio (LVR)

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If you’re looking at buying a property, chances are you’ve come across the term Loan-To-Value Ratio or LVR. But what does it mean and how does it affect you? Keep reading to learn more about the LVR and how to calculate it for your property.

What is Loan-To-Value Ratio (LVR)?

LVR stands for loan-to-value ratio. It’s usually presented as a percentage figure that represents the value of your home loan compared to the value of the property. The LVR is used by lenders to assess the risk associated with a loan and to determine the amount they are willing to lend to a borrower.

Why is Loan-To-Value Ratio (LVR) important

Lenders use LVR to evaluate the risk of a loan. A higher LVR indicates that the borrower is financing a larger portion of the asset's value with borrowed money, making the loan riskier.

In many cases, borrowers with higher LVRs may be required to pay lender’s mortgage insurance (LMI) or a low deposit premium (LDP) to protect the lender in case of default. Lower LVRs are often seen as less risky. Borrowers with lower LVRs may have access to more favourable loan terms and interest rates.

Loan-To-Value Ratio (LVR) and refinancing

Your LVR isn’t just important when you’re buying a home, it also plays a key role when it comes time to refinancing an existing property. If your deposit was less than 20% of the property value when you first bought your home, you might have had to pay LMI or LDP. Unfortunately, these fees are non-transferable, so if your LVR is still above 80% when you’re refinancing, you could have to cover the cost of LMI or LDP for a second time.

But rather than consider your deposit when calculating your LVR, you’ll instead use your home equity. Your equity is the proportion of your property that you own outright. It’s the difference between the amount owing on your home loan and the value of your property.

For example, if your home is currently valued at $500,000 and you still owe $250,000 on your loan, you have $250,000 in equity.

How to calculate Loan-To-Value Ratio (LVR)

Calculating your LVR is a lot simpler than you think. All you have to do is divide the loan amount by the bank’s property valuation and times it by 100. Just sub in your figures to the following formula:

(Loan amount / Property valuation) x 100 = LVR

For example, you’ve saved a deposit of $80,000 and you’ve found a property advertised for $500,000. That means you’d need to take out a loan of $420,000 to cover the remaining amount.

Assuming the lender’s valuation aligns with the advertised price, your LVR would look like this:

($420,000 / $500,000) x 100 = 84%

As a general rule, most banks and lenders consider loans with an LVR over 80% to be higher risk, so they’ll often charge you LMI or LDP to offset the risk. Based on the figures in the example above, it’s likely you’d be slugged with LMI or LDP to take out a loan to fund the purchase of the property.

If you have an LVR of less than 80%, you’re usually deemed less risky so you won’t have to worry about LMI or LDP. In a nutshell, the bigger your deposit, the lower your LVR will be.

It’s also worth noting that the LVR formula doesn’t take into account other upfront fees that are involved with buying a property, like building and pest inspections, stamp duty and conveyancing costs. So, when you’re running the numbers don’t forget to include these expenses in your general calculations too.

Bank valuations vs purchase price

It’s important to note that when it comes to calculating the LVR, you need to base the figures on the bank’s valuation of the property rather than the advertised price or purchase price. These are often two very different figures that will provide different LVR results.

What is a bank valuation?

Banks engage Certified Practicing Valuers (CPVs) to perform property valuations on their behalf. A CPV has undergone formal education and training in the field, so they’re qualified to complete property valuations. The CPV will complete a detailed analysis of the property which is used to create a legally binding report that details the definitive value of the property.

This figure ultimately provides an indication of what a lender will be able to recover from the sale of the property if you’re no longer able to make your repayments.

What is the purchase price?

On the other hand, the purchase price or market value refers to the current value based on the property market. A real estate agent can often provide an appraisal based on their professional knowledge, the property itself and recent comparable sales.

You can read more about the difference between property valuations and real estate appraisals here.

How the LVR affects your home loan

Beyond paying LMI or LDP, having a high LVR can impact your home loan in other ways too:

  • Higher interest rates: you might be subject to higher interest rates to help offset the risk of your home loan,
  • Higher repayments: paying higher interest rates means that you’ll be paying higher mortgage repayments. Especially if LMI or LDP has been added on top of your loan amount,
  • Less flexibility: higher risk loans often come with less flexibility, so you might not have the option to make additional repayments or refinance your loan as easily,
  • Limited loan features and facilities: with a higher-risk loan, you might also have limited access to loan features and facilities, like offset accounts and redraw facilities, and
  • Application scrutiny: your home loan application could be subjected to a more thorough investigation to ensure the bank is confident that you can make your regular loan repayments.

Please note that we currently do not offer offset accounts, but this feature is coming soon.

Learn more about Unloan and our great loan features today.

This article does not have regard for the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this, consider the appropriateness to your circumstances.

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