Loan to Value Ratio (LVR)
Loan to Value Ration or LVR expresses, in a percentage format, the risk you potentially pose to a lender as a borrower. The higher the figure, the bigger the risk you are considered to be by a lender.
Let’s break it down:
LOAN: The amount of finance you wish to borrow from the lender.
VALUE: The value of the property you wish to borrow / refinance against.
Loan Amount / Security Value = Risk Factor (multiply by 100 to express as a percentage)
So the LVR is the loan amount as a percentage of the overall value of the security property.
Let’s look at an example:
You would like to borrow a loan of $700,000 to purchase a house worth $1,000,000. You have the remaining $300,000 in savings to make up the difference.
700,000 / 1,000,000 = 0.70 or 70%
The loan amount is 70% of the value of the house. Thus, the LVR or risk factor to the lender is 70%.
Most lenders are happy to lend up to 80% of the security property value and consider the risk to be small.
Any loan over 80% will incur Lenders Mortgage Insurance (LMI).
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance or LMI is an insurance YOU will pay to protect the specific LENDER and is calculated depending on how high the LVR is. For example, you will pay more LMI if you’re borrowing 90% of the security value in contrast to 85% of the security value.
NOTE: It does not protect you as a customer – LMI protects the LENDER.
As a general rule, most lenders will lend up to 90% of the security value incurring LMI while others will go up to 95% incurring LMI.
Although LMI can be quite a large figure, the benefit to you as the borrower is simple, it allows you to get into your dream home that much sooner rather than having to save that dreaded 20% up front.