What new buyers need to know about LVR

Breaking into the Australian housing market can be overwhelming, especially given that property prices are steadily rising across the country.

One of the ways for people who want to own a house to get out of the housing market is to get a loan. Loans allow buyers to receive a lump sum payment that they can use to achieve their goals, which in this case means gaining a stake in the local housing market.

However, loans are not given just to everyone who wants them: lenders evaluate the borrower’s profile before granting them a loan agreement. They will measure your inherent risk by examining factors such as your income, savings, debts, expenses, and employment stability. They will also look at the value of the property you want to buy.

As a borrower, you should be aware of both of these factors, and there is one metric that covers them: LVR. LVR, also known as loan-to-value ratio, is a percentage of the property’s value that you are willing to borrow.

Understanding LVR is crucial for new buyers because this metric can impact your chances of loan approval, as well as the type of loan deal you’ll receive from the loan company you contact.

If you want to understand this concept further, read on. Let’s look at the basis of LVR and how it may affect new property buyers.

What is LVR?

First of all, it is important to understand what LVR actually means. LVR, or loan-to-value ratio, is a percentage that compares the amount you want to borrow to the value of the property you want to buy.

It has a formula expressed as:

LVR = Loan amount ÷ Property value × 100

Let’s say a property is valued at $800,000, based on an appraisal by your lender. Let’s also say you plan to borrow $600,000 from the same lender.

This means that 75% of the value of the property is covered by the loan, with the remaining 25% coming out of your pocket. In this case it is 75% LVR.

Having a lower LVR is generally better in the eyes of lenders as it means you are borrowing a smaller proportion of the value of the property and contributing your own money through the deposit.

Additionally, if your LVR exceeds 80% you will typically trigger lenders mortgage insurance, or LMI. This is an additional cost that protects the lender in case you are unable to repay the loan.

For this reason, many first-time buyers aim for an LVR of 80% or lower where possible; because this can keep upfront property costs low while also increasing the likelihood of a successful loan application.

If you want to learn more, you can read about it at: Westpac’s LVR guide.

Why is LVR important for new buyers?

LVR is important for new buyers because it is a crucial factor that lenders use when evaluating your home loan application.

The ratio is used to show a breakdown of how much money spent versus borrowed from one’s own pocket, giving investors a clear understanding of the risk they may be taking on by collaborating with a particular buyer.

Besides this primary function, there are other reasons why LVR is important. Here it is in more detail:

1. 
   

   Chance of credit approval

A low LVR is a sign that you have sufficient liquid capital to undertake a loan agreement with sufficient avenues for repayment.

This metric, along with positive factors such as a stable income, good savings history and employment records, increases your chances of receiving a favorable loan approval by assuring lenders that you can pay your dues on time.

2. 
   

   Credit terms and options

Your LVR may also affect the type of credit terms and options available to you.

If your LVR is lower, lenders may view your application more favorably because you are borrowing a smaller portion of the property’s value. This may give you access to more competitive loan products, better repayment structures or more flexible borrowing terms.

On the other hand, a high LVR may limit your options. Some lenders may impose stricter terms or restrict the loan products you can receive in the first place. In some cases, you may still be approved, but the terms of the loan may be less favorable than what a lower-risk borrower might receive.

3. 
   

   Lender mortgage insurance

Finally, lender’s mortgage insurance, or LMI, is another important cost associated with LVR that new buyers should be aware of. in Australia, LMI It is usually triggered when your LVR is above 80%; This means you are borrowing more than 80% of the property’s value.

This insurance protects the lender if the borrower is unable to repay the loan. Although the lender gets the protection, it is usually the borrower who pays for it. Depending on the lender, LMI may be paid upfront or added to the total loan amount.

For first-time buyers, LMI can increase the borrower’s chances of entering the property market sooner with a smaller deposit. But it can also increase the total cost of the loan. That’s why many buyers aim for a lower LVR where possible, especially if they want to reduce extra borrowing costs before paying off.

How can you improve your LVR before applying?

As a borrower, there are several ways to improve your LVR so that it looks more positive when applying for credit.

One way is to save for a larger deposit. Contributing more money upfront to match the value of your property can naturally lower your LVR because you won’t need to take out a large loan to buy the property.

You can also lower your LVR by choosing a cheap property, thus reducing the amount you need to borrow. You can also wait until you have enough savings before buying a property off the market.

Another way to take advantage of more favorable loan deals is to examine different loan requirements. Each lender recommends risks that may look different from each other; so understanding their thresholds in advance can help you stay informed about the best possible provider for your needs.

We hope this article helps you better navigate the Australian housing market. Good luck with your property hunting efforts!

DISCLAIMER:

This content is for general information only and does not constitute financial advice. It does not take into account your personal circumstances, including your goals, financial situation or needs. Independent advice should be sought before making any financial decisions. Any references to third-party products or websites are for general information purposes only.