Whether you’re buying your first home, moving homes, buying an investment property or refinancing, understanding how the loan to value ratio works can help you find the right home loan.
What is the loan to value ratio (LVR)?
The loan to value ratio (LVR) is the difference between the amount you need to borrow for a home loan and what your lender thinks your property is worth. It’s calculated as a percentage.
If you have $100,000 saved for a deposit and your target property is valued at $500,000, then you’ll need a loan of $400,000, so your LVR is 80%.
That works out as $400,000 ÷ $500,000 (x100) = 80%.
If you saved only $50,000 towards the same property, then your LVR rises to 90%.
That’s $450,000 ÷ $500,000 (x100) = 90%.
Note these calculations don’t include other upfront costs such as stamp duty or conveyancing. Remember to take all potential costs into account to give you a good idea of the deposit you can raise, and the likely LVR.
Which value does my lender use?
It’s important to know your lender’s value of the property may not be the same as the purchase price.
LVR is calculated according to what the lender thinks your property is worth, sometimes called a bank or lender-assessed valuation.
If your purchase price is different to this valuation, then the lender and their mortgage insurer (where required) will use the lower of the two prices to determine the LVR.
How LVR affects your borrowing power
The more you can put down as a deposit, the lower your LVR will be, so the less risk you pose to the lender.
Some lenders may reward you for having a larger deposit with lower interest rates, higher ongoing discounts and better package deals.
You can use AMP home loans tools and calculators to help work out how much you might be able to borrow and what repayments might look like.
What happens when LVR goes over 80%
On the other hand, when your LVR is higher than 80%, your interest rate and home loan costs may start to increase.
You may be required to pay lender’s mortgage insurance (LMI). This is a one-off premium, generally paid at settlement of your loan, that protects the lender from the increased risk brought on by the high LVR.
In most cases, the higher your LVR, the higher your LMI premium will be.
What's the maximum LVR I can have?
The limits of what you can borrow vary and are determined by your lender and the circumstances of your loan. For instance, your costs may be different if you’re borrowing to invest, rather than as an owner-occupier.
- Some lenders have a maximum LVR of 90%. This means you would need at least a 10% deposit to be eligible for a home loan.
- Others have a maximum LVR of 95%. That means you could secure a home loan with as little as a 5% deposit.
- Following the global financial crisis, Australian banks tightened their lending criteria. Lending someone 100% is considered very risky, although this might still be possible with a guarantor.
- Eligibility for higher risk loans is usually determined by the lender on a case-by-case basis.
Bear in mind that having a higher LVR means you’re borrowing more of your home’s value, which might leave you vulnerable to rising interest rates.
Refinancing and LVR
When you’re looking to refinance, the lender will arrange for a new valuation of your property. That’s because the price you paid for your house may be different from its current market value. Your new LVR will be calculated on the new lender-assessed value.
You can use the AMP home loan refinance calculator to help work out what’s right for you.
This information is provided by AWM Services Pty Ltd (ABN 15 139 353 496), is general in nature only and hasn’t taken your circumstances into account. Before deciding what’s right for you, it’s important to consider your particular circumstances and read the relevant product disclosure statement or terms and conditions available from AMP at amp.com.au or by calling 131 267.
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