What is LVR and how does it affect or loan?
LVR is an acronym for Loan-To-Value Ratio. The LVR is the amount you are borrowing against the property value being used as security, represented as a percentage.
How LVR is Calculated
LVR is calculated by dividing the loan amount by the appraised value of the property, then multiplying by 100 to get a percentage.
For example, if you want to buy a property valued at $500,000 and you need a loan of $400,000, your LVR would be:
Impact of LVR on Your Loan
Approval Chances
- Low LVR (80% or less): Typically seen as lower risk by lenders. Easier approval process.
- High LVR (above 80%): Considered higher risk. May require additional scrutiny, and approval may be more challenging.
Interest Rates
- Low LVR: May qualify for lower interest rates because the lender’s risk is reduced.
- High LVR: Often comes with higher interest rates due to the increased risk for the lender.
Lenders Mortgage Insurance (LMI)
- Low LVR: Usually does not require LMI.
If LVR exceeds 80%, lenders typically require LMI to protect themselves against the risk of borrower default. This insurance can be a significant additional cost.
Borrowing Capacity
- Low LVR: May allow for higher borrowing amounts since the risk is lower.
- High LVR: Lenders might limit the amount you can borrow to mitigate risk.
Equity Requirements
- Low LVR: Means you have more equity in the property, providing a buffer in case property values drop.
- High LVR: Less equity in the property, increasing the risk of owing more than the property is worth if property values decline.
Additional Conditions
- Low LVR: Generally, fewer conditions or restrictions.
- High LVR: Lenders may impose stricter conditions or require additional documentation.
