What You Must Know About LVR
Last updated on May 4th, 2022
If you have purchased a property or are planning to get one, you must have come across the acronym LVR. It is an essential element that home buyers must consider that can affect their home loan eligibility and repayments.
However, not everyone truly understands what LVR is. Read on if you are also confused about what it is and how it affects your home purchasing journey.
What is LVR, and how is it calculated?
LVR is a percentage that indicates the size of the home loan compared to the target property’s value. It is related to the risk that comes with a home loan. Generally, higher LVRs bring more risks to the lending institution. On the borrower’s side, higher LVR can also mean higher interest rates and repayment amounts.
The lending institution calculates a home loan’s LVR by dividing the applied loan amount with its independent valuation of the property you plan to purchase. To express the answer in percentage, it is then multiplied by 100.
Here is a quick illustration: if you are applying for a loan amount of $500,000 and the property you are buying is valued at $700,000, the computed LVR is 71%.
The difference between the amount you will borrow and the property’s value equals your home deposit. This means that the higher the amount of your home deposit, the lower the amount that you will need to borrow. This results in a lower LVR. Of course, a lower home deposit will result in a higher loan amount. Thus, you will also end up with a higher LVR.
Are bank and market valuations of the property the same?
You might be surprised when your LVR is computed based on a different property value than what your real estate agent gave you. This is because the value used by your lender is an independent valuation requested by the bank. In some instances, the bank’s valuation differs from what the real estate agent believes the property is worth.
The bank performs a separate valuation as part of its risk assessment. No bank will want to lend more than what the real estate property is worth. Before they give you the home loan amount you applied for they will want to know how much they can recover, should they have to sell the property in the future. Of course, this will happen only if you won’t be able to meet your mortgage obligations.
Can I still get a home loan if my LVR is more than 80%?
Yes, you can get a home loan with an LVR that exceeds 80%. However, you may have to meet certain additional conditions, including getting a lender’s mortgage insurance (LMI). Borrowers with LVR of more than 80% are considered risky, and banks will want to protect themselves. If the borrower can no longer pay the monthly repayments, the insurance will protect and cover the lender.
Borrowers can pay for the LMI as an advanced fee. It can also be incorporated into the home loan, and interest will apply to it.
Can I get a home loan with 100% LVR?
Some banks are willing to provide home loans with 100% LVR, provided that you have a guarantor. A guarantor refers to a person who assures the lender to pay for the monthly mortgage when the borrower fails to do so.
What are the cons of home loans with high LVR?
Applying for a home loan with a high LVR has drawbacks for the borrower. Here are the risks that you should know if you are considering a high LVR home loan.
- You have to pay for LMI.
- The bank will charge higher interest rates.
- You will have to pay higher monthly repayments.
- The bank will be stricter with your requirements and background checks.
- Some last notes on LVR.
When looking for a home loan product, ensure to check the allowed maximum LVR. It will help you determine how much home deposit you should prepare or if you should look for another loan product. For home loan comparisons, check Makes Cents to get only the best home loan deals that suit your needs.
