Let’s get down to it! LVR stands for loan-to-value (or less commonly loan-to-valuation) ratio. Basically, lenders are looking for a simple ratio that gives them an idea of the risk involved if the loan is granted.
LVR is generated by a very basic calculation.
In one hand, you’ve got the money you can contribute, and in the other hand, you’ve got the asset you want to invest in (in this case we’ll call it property, though LVR applies to all types of loans).
What all lenders are looking for is a workable balance between both of these things. That’s all the percentage means — how much a lender is willing to loan you against the total value of the asset you plan to buy and the equity you’ll have in that purchase.
LVR is one factor that banks look at when assessing the risk of a loan. Generally, the lower the LVR of the loan, the less risk a lender is taking on the borrower, as they’re covered by the asset. Less risk for the lender means lower interest rates and repayments for borrowers with lower total LVRs. It’s all about subverting risk.
Everything in the known world has to have some kind of balance to it, and LVR is no exception. All the lenders are doing is weighing up the associated risk to their institution and seeing if they can get something together that looks shiny for everyone (but let’s be realistic — usually more shiny for them!). So let’s take a gander at that goose and see if there’s a golden egg to be laid.
Great, now you have a platform to work from when you’re looking for a home loan package, or better still, when your mortgage broker is searching for the best deal for you.
LVR & LMI — How They Correspond
Until very recently, it was near impossible to avoid Lenders Mortgage Insurance (LMI) if you didn’t have an LVR of 80% or lower, or in other words, a deposit of 20%. It didn’t matter to the banks or lenders that you had the ability to service a larger loan, it was just their bottom line.
Yes, it’s true: until new wave lenders like Sucasa arrived on the scene, your only options if you failed to get this 80% LVR were:
- guarantor home loan
- parental lending aka ‘the Bank of Mum and Dad’ (or your favourite benefactor)
- government schemes
- being one of a variety of high-earning professionals deemed worthy of blind trust
Basically, LVR and LMI are the two most crucial elements determining your property-buying future as far as the lenders are concerned.
The broader picture of your circumstances and how hard you’re willing to work for your own security takes a back seat. This doesn’t necessarily mean you can’t be in control from back there, it’s just important to understand what lenders are weighing up when considering whether to issue a loan.
Some lenders, thankfully, can now offer up to 98% of a property’s LVR. While this might mean you’re able to buy a property sooner since you don’t have to save as long for your deposit, it’s also worth remembering that the more you borrow up front, the more you’ll pay back in interest over time.
As far as government schemes go, there have been consistent federal and state government incentives to help out first home buyers across Australia, from one off payments like the First Home Owner Grant to concessions on stamp duty. Researching these can seem like a drag sometimes, but considering the outcome will be ways to save yourself money, it’s time well spent. We know you’ve heard it before, but time is money and there’s no getting around it.
LVR & The Wrong Side Of The Tracks
It’s worth noting that LVR can also be affected by location. The saying with property has always been ‘location, location, location’, however, just as some borrowers have bad credit scores and low savings that interfere with their chances of getting a loan, some lenders may also cap the LVR on home loans according to the suburb a property is located in.
This is because some lenders impose stricter lending policies for areas or postcodes they consider higher risk — for example, where the property market may not be considered as ‘active’.
This is pretty uncomfortable territory to be in, but where you buy is always going to have an effect on the LVR because it’s not just about the ratio, it’s about the increasing value that property has on the LVR.
If you have a 30 year standard mortgage and in that time your property doesn’t increase in value at parity with the rest of the market due to the area you’ve bought in, then you have a problem. Especially when you consider the interest you paid on top of the actual loan figure. Some lenders are just trying to get ahead of this, as ultimately they’re securing their own investment.
Make sure you check this carefully with your lender before you apply for your home loan. If you think that it might apply to you or where you’re hoping to buy, look into it so you know exactly how much you need to save before proceeding with your application.
Additionally, keep in mind that your credit score, income, and debt-to-income ratio are also important factors that lenders will look at when assessing your application. You may want to work on improving these factors as well in order to increase chances of approval and lower interest rates.
In regards to where you buy, remember that deciding on somewhere cheaper to live can have a knock-on effect with your income and this will show up when you calculate your borrowing capacity.
Hypothetically speaking, moving to a rural area where you can afford a larger property for the same price or less than in a bustling metropolis may seem like a shiny idea. However, if you’re unable to earn at the same level in this new area, this could potentially cause an issue from the lender’s perspective.
The good news is you can always decide to buy an investment property first, which can be a great option for many, especially with record prices still being reached in the capital cities.
There are a million and one property investment blogs flagging potential ‘up and coming’ areas in Australia because the demand is still so high for affordable housing. Do some research into new areas but always, always look at the local infrastructure and amenities, as you don’t want to buy in a place that doesn’t have a community for you to become a part of.
LVR — Let’s Wrap It Up
Really, the aim for many buyers with property is to get a good foothold on higher ground so that they’re in control. You can do this before you buy a property by either saving a larger deposit or by looking for properties that are cheaper than what you originally had in mind, as mentioned previously.
With an LVR of 80% or better, you’ll avoid the inconvenience of LMI, but more importantly, you’ll likely pay lower interest rates and obviously less total interest, as the principle loan is lower.
So once you have secured your first property, by getting your LVR into the best shape you can manage, you’ll open up more future options. A low LVR will give you the best deal on your loans regardless.
A bit further down the road it may be as simple as refinancing to a lower rate with a different lender once you’ve paid down some principle and got your cash flow in order after the big purchase.
More importantly, by boosting your LVR on your existing property, you create an option to increase your portfolio with the addition of an investment property or by upsizing, in line with the potentially growing needs of your life, and without having to sell your original investment.
If you’re able to pay down your loan and really get a cracking-looking LVR working for you on your primary property, lenders will then take into account the extra equity you have in that property toward any future purchases.
Stomach in knots over your home ownership future? At Sucasa, we know the ropes. Contact us today and let’s unfurl a solution together.