LVR - Loan to Value and its Impact on Borrowing Power

Whether you knew it or not, your LVR can have serious implications on your borrowing power.

But what is LVR? How is LVR calculated? Let’s explore.

LVR Meaning and How It is Calculated

In the simplest possible terms, LVR, or Loan to Value Ratio is simply the ratio of how much you intend to borrow (your loan) to the value of the asset (value) you’re looking to buy.

To calculate LVR, it’s as simple as dividing your loan amount by your value.

• For example, let’s say we wanted a Loan of $400,000
• We are looking to buy a property with a value of $500,000
• We simply calculate 400,000 ÷ 500,000 and get 0.8.
• 0.8 X 100 = 80
• Therefore, our loan to value ratio, or LVR, is 80%

LVR is used by lenders when assessing your suitability for a loan. It’s also something which will be taken into account when determining whether or not, as a borrower, you’ll need to pay Lenders Mortgage Insurance, which we’ve blogged about before – something which can add tens of thousands of dollars to your loan.

Generally speaking, the lower the LVR you’re able to present with, the better, but a higher LVR doesn’t always mean you’ll be denied the loan you’re after.

This is because, the lower your LVR, the larger deposit you have available. This gives you the ability to show your lender that you’ve been able to responsibly save a deposit, and are more likely to be able to manage your debt and make repayments.

What Can Effect my LVR?

Property price fluctuations

As we all know, property prices have a habit of not staying static. It’s important to remember that as time passes, the value of the property you intend to buy may change. So, your calculated LVR at one point in time may need to be re-assessed when it comes time for you to actually apply for a loan.

You decide to borrow more or less

So, you’ve got your deposit saved? Great! Although it may seem unlikely, you may decide to add to or subtract from your deposit before you apply for finance. Adding on large cash portions from tax returns or an inheritance, or having to dip into your savings for emergencies can mean that your deposit amount can change.

Know all the home buying costs

If you’re getting serious about home-buying, you’ll probably be aware of some of the lesser known costs involved in purchasing property.

But if you’re a newbie, you may not have taken into account things like Stamp Duty, LMI and other fees.

Where is this money most likely going to come from? Your deposit.

These costs may mean your deposit amount can be significantly less than you thought you had.

 

Independent vs market valuation

When calculating your LVR, you may have chosen to use a market value for the home you’re looking to buy. Chances are, your lender will wish to conduct their own independent valuation of the property, and the difference between these valuations can mean your LVR can change.

What is the maximum LVR that I can borrow?

This will depend entirely on the lender you choose to approach for your loan. Each lender will have their own risk appetites which help them determine what LVR is acceptable for each of their loan types.

For example, at Greater Bank, for our Ultimate Home Loan, Great Rate Home Loan, Ultimate Investment Home Loan and Great Rate Investment Home Loan, borrowers are required to have an LVR no greater than 80% to avoid paying Lenders Mortgage Insurance.

Now, this isn’t to say that a borrower with an LVR of 85% will be turned away for any of these loan types – it simply means that our lenders will have the conversation with borrowers around the fact that if their loan gets approved, they will have to pay LMI.

At times, lenders may run promotions which give borrowers access to special conditions based on their LVR and other factors. 

Greater Bank

Generally speaking, the higher the LVR you have, your loan may be considered a higher risk. To do your homework, why not start by using our handy Borrowing Power calculator here.

How can I lower my LVR?

Build your deposit

Look, it may not be a short-term fix, but the best way to impress a lender is to show them your ability to aggressively save and add a larger deposit. This will bring your LVR down, as you’ll need to borrow less to buy the property of your choice.

Get help from family

If you’re lucky, you may be in a position where your parents or other family members can offer to contribute towards your deposit amount. This is not frowned upon, but it’s not an option open to everyone. This will also boost your deposit amount and bring your LVR down.

Family Pledge/Guarantor Loan

Again, if you’re lucky, you can ask a parent to help you apply for a guarantor loan, acting as your guarantor. These loans, like our Family Pledge option, don’t require a maximum LVR, as they allow your guarantor to contribute towards your deposit amount by using their own property equity as collateral. Our Family Pledge is also a way to get around paying LMI – find out more about Family Pledge here.

How is LVR Calculated for Refinance Loans?

LVR for refinance loans is essentially calculated in the same way as for a first-time borrower, but there are a few small things to remember.

When calculating the value of your property, a lender will want to do their own independent valuation, since the price you paid for the property some time ago may not reflect it’s current true value.

But, the formula remains the same – just think about it as if you were buying a brand new home.

For example, let’s say we had a current loan balance of $550,000 (loan) and a property that has been valued at $760,000 (value).

• Calculate your loan or 550,000 ÷ 760,000 = 0.72
• 0.72 X 100 = 72
• Your loan to value ratio is 72%

Are there any costs involved?

There are no costs involved in calculating your LVR, but if you’re after your LVR for the purposes of refinancing, then yes, you could potentially face some costs.

These could include things like early exit fees and break fees from your current lender, as well as application/establishment fees and potentially even LMI from your current lender.

Check out our guide to refinancing your home loan now for a full breakdown.

We're here to help

At Greater Bank, we’re proud of our reputation as responsible and solutions-oriented lenders. We’ve been helping locals with their home loans in the communities we call home since 1945.

Whether you’ve calculated your LVR and want to buy your first home, or your looking to refinance, or even if you just want to chat about your options, make a home loan enquiry to start a conversation with your local lending expert today.