What is Loan to Value Ratio (LVR)?
What is Loan to Value Ratio?
The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘loan-to-valuation ratio’. Here’s what it means.
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the loan-to-valuation ratio (LVR) is one of the most important considerations.
How to calculate the LVR?
In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80 per cent of the property value, making your LVR 80 per cent.
LVR is important because different lenders and loan types have different maximum LVRs, and some lenders will only lend up to a certain LVR depending on the type of property and borrowers circumstances. For an example; in certain instances, if you are seeking finance (or refinancing) an investment property most lenders would have a maximum Loan to Value ratio in most cases at 90 per cent.
Will the LVR have an impact on the mortgage rate?
LVR will impact the mortgage rate in many instances. Higher Loan to Value ratios will generally attract a higher mortgage rate. 80 per cent (20 per cent deposit) is the general benchmark that will help attract competitive home loan rates and broader products choices.
Higher LVR’s (greater than 80 per cent) will also restrict the number of lender/product options. Generally, the maximum LVR would be 98 per cent (including Lenders Mortgage Insurance capitalisation).
Important to note that the LVR could change even once the mortgage application’s submitted. This is mainly due to the fact that the lender’s valuation of the property is less than what you had agreed to purchase at.