LVR or Loan to Value Ratio is very crucial for lenders/credit providers because it will help them in determining your mortgage interest rates as well as the amount of Lenders Mortgage Insurance. You must remember that higher the LVR, higher the interest rates. But, don’t worry you can employ a finance broker who will help you in obtaining the best LVR on mortgage loans.
When assessing mortgage loan applications for any of the following properties being offered as security by borrowers, the lenders/credit providers will make a calculation to determine what is known as the Loan to Value Ratio (LVR) and the LVR is expressed as a Percentage.
- Owner occupied homes
- Investment property residences
- Commercial properties
- Rural properties
What is a Loan to Value Ratio (LVR)?
The Loan to Value Ratio (LVR) is a financial term used by lenders/credit providers, which tells them:
- How much of the security property is being financed, and
- How much equity you have in the security property
How is it calculated?
The Loan to Value Ratio is calculated as:
Loan to Value Ratio = Loan Amount/Security value of the property X 100
For Example – You need to borrow $90,000 to purchase a property valued at $120,000. The LVR ratio yields a value of about 75%. The remaining 25% represents your equity in the security property. The higher the LVR, the riskier the loan is to the lender/credit provider.
Can I calculate it on my own?
Yes, you can. To calculate your Loan to Value Ratio for the security property you are considering purchasing or refinancing, simply visit any website that provides LVR Calculators. You can then fill in the details to see what the Loan to Value Ratio percentage is for the security property you are purchasing or refinancing.
Why is my Loan to Value Ratio (LVR) Important?
The Loan to Value Ratio is one of the key factors that lenders/credit providers will consider when you are trying to qualify for a mortgage loan. They will evaluate your LVR according to their following guidelines:
- A lower LVR will qualify you for lower mortgage interest rates
- A higher LVR will qualify you for higher mortgage interest rates
- With a lower LVR, you will be considered to be less risky because you have more equity in your security property
- With a lower LVR, you will be considered less likely to default
- A lower LVR (e.g. 75%) can save you thousands of dollars in Lenders Mortgage Insurance(LMI) premiums
- If you have a high LVR, the lenders/credit providers can require you to buy Lenders Mortgage Insurance (LMI) to protect their investment from any default by you. Thereby, increasing the costs of your mortgage loan.
- If your credit history is good, some lenders/credit providers may allow you to borrow up to 100% of the security property’s value. On the other hand if you do not have a good credit history, it may not matter what your LVR is.
How is the Value of my Security Property determined?
Most lenders/credit providers will undertake the valuation on the property being offered as security. They will request the valuation to be performed on their behalf by a panel valuer. If the Estimated Market Value (EMV) of the security property being offered is lower than either the purchase price or the loan amount being refinanced the lender/credit provider can require:
- You to provide additional security
- A reduction in the loan amount, or
- You to buy Lenders Mortgage Insurance (LMI)
If you are overwhelmed about the LVR of your loan or want to obtain the best LVR, it is better to take help of a finance broker. He/she will help you save on Lender’s Mortgage Insurance (LMI). If you select a professionally qualified finance broker, he/she will be able to accurately tell you about the LVR of your several investment properties held with more than one lender/credit provider. The finance broker will also restructure your investment property finance with one lender to avoid any confusion.