As a hopeful homebuyer, you will come across many new phrases in your home loan journey. One of these will be Loan-To-Value Ratio (LVR). If you’ve never heard of LVR and feel unsure about how this fits into your home loan process, rest assured that our below guide will educate and empower you.
What is Loan-To-Value Ratio?
When you begin your home-buying journey, one of the most critical factors you’ll need to address is the required deposit. It’s common knowledge that most lenders require a 20% deposit before they will approve your home loan. While you could be forgiven for thinking this figure is set at random, it is actually based on what is known as the Loan-to-Value Ratio (LVR). In this context, the LVR is simply the home loan amount divided by the value of your property, as demonstrated in the graphic below.
How does LVR impact my home loan process?
So how does this ratio actually impact your home loan process? LVR is an important measure for lenders, and the outcome of your ratio can affect certain aspects of your home loan application outcome.
Interest rates
It is common for lenders to offer lower interest rates to applicants with lower (or better) LVRs. This is because a lower Loan-To-Value Ratio implies less risk for the lender.
Lenders Mortgage Insurance
In Australia, if your LVR is higher than 80%, you will need to take out Lenders Mortgage Insurance (LMI). LMI is insurance that protects the lender, in case you default on the mortgage payments.
Loan approval
Your Loan-To-Value Ratio can influence your likelihood of securing a mortgage. Having a higher LVR will encourage lenders to be more weary of your financial situation, which may reduce their confidence in lending to you.
At Borro, we’re here to support your property journey, wherever that may take you. To discuss how we can help get you the perfect loan for your perfect home, book an appointment with one of our Borro brokers today or call the team on 1300 1BORRO.
