What is LVR?
The Loan to Value Ratio (LVR) is a percentage representing the amount you’re borrowing in relation to the value of the property you intend to purchase. A higher deposit result in a lower LVR. Understanding LVR is crucial when organizing your home loan.
It’s important to note that certain upfront costs, like conveyancing and stamp duty, are not factored into the loan amount when calculating LVR.
To calculate your LVR, divide the loan amount by the property’s purchase price or valuation and express the result as a percentage. For instance, if you wish to borrow $350,000 for a property valued at $500,000, the LVR calculation would be: ($350,000 loan ÷ $500,000 property value) x 100 = 70% LVR.
When assessing the property value for LVR calculation, lenders typically use the lower of the purchase price or bank valuation.
The LVR significantly influences your loan application assessment by lenders. Lower LVR indicates lower risk for the bank. Lenders often view LVRs exceeding 80% as higher risk. The LVR limit banks allow depends on factors such as the loan amount, property location, credit history, income, employment, and the loan type.
If your LVR exceeds 80%, you usually need to obtain Lenders’ Mortgage Insurance (LMI).
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is a type of insurance that protects the mortgage lender if a borrower defaults on their home loan and the proceeds from the sale of the property are not sufficient to cover the outstanding mortgage balance.
LMI is typically required by lenders when a borrower is unable to make a 20% deposit on purchase price of the property.
It’s important to note that LMI does not protect the borrower; instead, it safeguards the interests of the lender. Borrowers usually pay the LMI premium, either as a one-time upfront payment or as part of their ongoing mortgage payments. The specific terms and conditions of LMI can vary, and the cost is influenced by factors such as the loan amount, loan-to-value ratio, and the insurer’s policies.
How to avoid lender’s mortgage insurance?
Usually, lenders don’t require borrowers to pay for lenders mortgage insurance (LMI) if they have a deposit that’s more than 20% of the property’s value, which corresponds to an 80% loan-to-value ratio (LVR). The reason behind this is that lenders see borrowers with deposits over 20% as less likely to have difficulties repaying the loan. A 20% deposit is considered a substantial amount and acts as a safety cushion for lenders. It helps protect them in case the property value decreases, ensuring they can recover the owed amount in case the borrower defaults on the loan.
The other ways of avoiding LMI can be having a guarantor, getting assistance through home guarantee schemes, and working in a highly- regarded professions that are considered to be highly paid and relatively stable which allows you to borrow up to 90 % LVR without having to pay LMI.
What happens to my initial Lenders Mortgage Insurance when I refinance?
LMI only applies to your initial loan, but if you refinance, the lender assesses the risk again. If your LVR is below 80%, you won’t be charged LMI again, however if the LVR remains above 80%, you will probably need to pay for LMI twice. Paying off your mortgage faster builds equity and reduces the LVR. You can also increase your property value through renovations. Another option is having a family member act as a guarantor. So, aim for an LVR under 80% or take steps to decrease it when refinancing.