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Home loan-to-value ratio (LVR) explained

    


When discovering how much you can borrow, you’ll likely hear the term ‘loan-to-value ratio’, or LVR. Here’s what it means, and how it directly affects your interest rate and Lenders Mortgage Insurance costs.  

Essentially, your LVR percentage is your loan amount divided by the bank’s valuation of your property. It’s used by lenders to work out the level of risk before offering a home loan.

 

LVR and your deposit

While homebuyers may tend to think in terms of how much deposit they have and ‘property price’, banks tend to talk about LVR and their assessment of the value of the property. So when working out your LVR, remember to base it on the bank’s valuation (if you have one) rather than the price you’re prepared to pay.

 

A lower LVR means less risk for us

Let’s say a borrower could no longer make repayments, and the bank had to sell the property. With an LVR below 80%, there’s less risk to the bank, as the property’s market value is more likely to cover the cost of the loan.

An LVR over 80% means there’s a higher risk that the bank wouldn’t recover the full loan amount, as the sale price may not cover the amount borrowed. This means your interest rate may be higher and you’ll likely need to pay Lenders Mortgage Insurance (LMI), to offset the higher risk.

 

Lenders Mortgage Insurance, for an LVR over 80%

Generally, if your deposit’s less than 20% and/or your LVR’s over 80%, you might still be able to get a loan if you pay LMI, though the interest rate might be higher.

Bear in mind, LMI insurance protects the lender, not you. If you default on your home loan and your property sells for less than what you owe, you’ll still be liable to pay the shortfall.

 

How to calculate and reduce your LVR  

Let’s say you want to buy a place for $510k, the bank valuation is $500k, you have a $50k deposit and want to borrow $450k. You’ve also factored in other costs, like stamp duty, LMI and legal expenses. 

 

 
  • $50,000 deposit ÷ $510,000 purchase price = 0.098 x (100 for a percentage) = 9.8% deposit based on purchase price
  • $50,000 deposit ÷ $500,000 bank valuation = 0.090 x (100 for a percentage) = 9% deposit based on bank valuation
  • $450,000 loan ÷ $500,000 bank valuation = 0.9 x (100 for a percentage) = 90% LVR

 

With 90% LVR, you’ll need to pay LMI costs and your loan might have a higher interest rate. But if you borrowed only $400k and increased your deposit to $110k, you’d bring your LVR down to 80%.

 

 
  • $110,000 deposit ÷ $510,000 purchase price = 0.216 x 100 (for a percentage) = 21.6% deposit based on purchase price
  • $110,000 deposit ÷ $500,000 bank valuation = 0.02 x 100 (for a percentage) = 20% deposit based on bank valuation
  • $400,000 loan ÷ $500,000 bank valuation = 0.8 x 100 (for a percentage) = 80% LVR

 

A guarantor can also lower your LVR  

Saving a 20% deposit can take years, especially if it’s your first place. But there is a way for your family members to help you buy earlier, by acting as a guarantor for part of your home loan. It’s called the Bank of Melbourne Family Pledge^, and it’s designed to lower your LVR and therefore help you reduce or avoid paying LMI.

Bear in mind, your family member would be liable for the amount agreed in the Family Pledge guarantee. So if you’re not able to pay your loan – and your family member doesn’t have the cash to pay Bank of Melbourne (if asked) – your family member’s house could be sold to cover it. You can read more about our Family Pledge here

 

Talk with us about a bank valuation

Sometimes there’s a difference between the market value (which is calculated using current sales trends in surrounding areas) and the bank’s valuation. The valuation reflects longer-term sales history as well as current market trends, and tends to be more conservative than the market value. 

The good news is, for private sales we can organise a bank valuation during the cooling off or finance period, so you’ll know if there’s any shortfall you need to cover. If it’s an auction, talk with us before bidding, as your bank valuation might only happen after the auction. Request a call back.

 

In summary

Your loan-to-value ratio directly affects the loan we can offer you:

  • Your LVR is your loan amount divided by our property valuation 
  • The higher your LVR, the higher your interest rate and loan insurance costs might be
  • You’ll likely pay loan insurance costs if your LVR’s over 80% 
  • There are options which could lower your LVR 
  • Talk with us about a bank valuation before you buy or bid.

 

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The Detail

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

^Family Pledge Credit criteria, fees, charges, T&C's apply. Your Australian family members will be required to seek independent legal advice before offering their home to guarantee a loan.
1. Credit criteria apply to the assessment of the adequacy of any proposed guarantee limit.
2. Portfolio Loan and owner-builder applications are excluded. Other exclusions may apply. 

LVR stands for the initial loan to value ratio at loan approval. LVR is the amount of your loan compared to the Bank’s valuation of your property offered to secure your loan expressed as a percentage. Home loan rates for new loans are set based on the initial LVR and don’t change because of changes to the LVR during the life of the loan.