Loan to Value Ratio otherwise known as LVR is a percentage figure that compares how much a lender is willing to loan you against the total value of the asset you plan to buy. This is calculated by dividing the amount of your home loan by the purchase price/valuation estimate of the property.
Your Loan to Value Ratio is a method used by lenders to gauge how much risk is involved when considering loaning you money. The Loan to Valuation Ratio is the way of working out the true financial value of a property, and decides whether the Home Loan needs to be covered by Lenders Mortgage Insurance or not. Usually lender’s mortgage insurance is payable if your LVR is above 80%. This is a one-off insurance premium payable per lender to protect the lender should you default on your home loan, click here to read more in our article.
The higher the Loan to Value Ratio is the higher the risk is that the lender will not be paid if you default on the loan and they have to sell the property. Having a high LVR will also affect your ability to refinance your loan later on and if you change lenders during this time you will be up for Lenders Mortgage Insurance again if the LVR on the new loan is the same if not higher.
In most cases your Loan to Value Ratio is a tool lenders use to work out the interest rate for your home loan. If your LVR is more than 80%, you will more than likely be charged a higher interest rate than a borrower with a lower LVR say at 70% as they are not as high risk as you are. This could make a big difference to your repayments, so it is important to pay down as much as you can afford to reduce the size of your loan and try to get your LVR under 80%, if you talk to a mortgage broker they will be able to advise you of your options and provide an explanation around this.
You must take into account that the value of a property is determined by an independent valuation report and not the price someone has paid for it or alternatively thinks the property is worth. There may a difference between the valuer’s price and the purchase price.
If you have a question regarding specific information regarding Lender’s Mortgage Insurance or about Loan to Value Ratios, or would simply like to have a discussion about your lending structure and the options available to you don’t hesitate to get in touch with your mortgage broker Gerry and he will be able to assist with answering any questions you have.