Loan to Value Ratio: How low can you go? The benefits of having a small LVR
In the process of applying for a loan for a property, Loan to Value Ratio (LVR) is a term that is going to come up a lot.
LVR is expressed as a percentage, but really, it’s more than just a number. It’s a way of quickly comprehending your position when applying for a mortgage.
Understanding LVR and what LVR you should be aiming for can save you money on your loan and help you avoid appearing risky to lenders.
What is LVR?
LVR is the value of your home loan divided by the value of your property.
For example, if you had a deposit of $100,000 and the property you wanted to purchase was appraised for $500,000, you would need to borrow $400,000. This means your LVR would be 80%.
As a rule, the lower your LVR is, the better, the more equity you have in your property and the better the interest are generally better with a low LVR.
Why is a low LVR important?
The reason for LVR is because the lenders want to be reassured that you are able to pay your mortgage, but if there is a reason that you are not able to make your repayments and the lender has to sell your property, the sale will be able to pay out the mortgage held against the property. The greater the difference between the property’s value and the loan amount, the lower the risk is to the lender.
LVR and buying off plan
As an off plan buyer, there are two main factors that can positively impact your LVR:
- Your off plan property has increased in value since you first exchanged, or
- You have saved a larger deposit than anticipated before settlement
If your valuation comes back higher once your off-plan purchase is completed, we use the valuation figure for your loan, not the contract amount.
There are a lot of options now with LVR, first home buyers have access to LVR’s of 95% with no lenders mortgage insurance (LMI). There are some banks who are offering 90% lending with no LMI, but the most common LVR is at 80% with a 20% deposit.
The most effective way to have a low LVR, and the only factor you have direct control over, is the size of your deposit. It’s important that you take active steps to budget and save so you can accumulate as large a deposit as possible.
That said, if you can’t scrape together a 20% deposit, don’t panic. According to Shelley Stone of BOS Financial Services, you’re in the majority.
“I would estimate that 90% of the first home buyers who we help borrow more than 80% of the purchase price. The reality is that while a 20% deposit is ideal, it’s very hard to achieve. Luckily, there are a lot of other ways we can help buyers achieve their property goals, even without a guarantor."
The benefits of a low LVR
- Better borrowing power: This means you have more loan options. You may even have access to smaller lenders who can give you special deals.
- Pay less: The lower your LVR, the less money you pay on LMI. Even better, if your LVR is 80% or under, you won’t have to pay for it at all. Most lenders also offer a lower interest rate if your LVR is 80% or less.
- More equity: Equity is the market value of your property minus the amount of money you still owe on your mortgage. So, it follows that the lower your LVR, the more equity you have. This equity could then be used to purchase additional properties.
Shelley took us through two recent examples of first home owners applying for a loan and how they navigated the issue of LVR.
Case Study One: Dylan & Phillipa - First home buyers
Philippa and Dylan signed their off-plan contract for $440,000 in 2023 and paid a 5% deposit of $22,000.
They have now been notified of valuations been called and their valuation has come back at $460,000. We use this new valuation amount for their figures and lending.
As first home buyers, they are stamp duty exempt and only need to pay 5% deposit under the Government scheme, but they have saved another 10% deposit, they have 15% in total.
There figures would look as follows:
- Value $460,000 – 80% is $368,000
- Purchase Price $440,000
- Deposit Paid $22,000
- Stamp Duty $0 – FHB
- Costs $5,000
- Total mortgage will be $379,000
They only need to contribute $44,000 as first home buyers and there is no LMI.
Case Study Two - Taryn & Tyson – Investors
Tyson and Taryn have an investment property in Brisbane, valued at $1,000,000 and they owe $550,000 on this investment. They have purchased off plan for $950,000 and paid 5% deposit of $47,500. They will have to pay stamp duty and costs which is a total of $36,000. They are going to live in their new off plan purchase in ACT.
They have decided to get equity out of their Brisbane property and bring the mortgage on this loan to 80% which will be $800,000 and they will have surplus cash of $250,000. This $250,000 will go into their offset account and be used for their purchase. This will allow the properties to remain stand alone.
Their figures for their purchase would be as follows:
- Value $980,000
- Purchase Price $950,000
- Stamp Dump & Costs $36,000
- Deposit paid $47,500
- Money from their investment equity $250,000
- Total mortgage $688,500
At Independent, we recommend chatting with a mortgage broker when you first start planning to purchase a home or investment property. For home loan advice and an overview of where you are at prior to purchasing or applying for a loan, please reach out to Shelley and her team any time. With so many bank options, there is usually a solution for everyone’s scenario.
At Independent, we recommend chatting with a mortgage broker when you first start planning to buy a home. Once you know what your borrowing power is, get in touch with one of our agents in the area you’re looking to buy into. They can give you an early scoop on properties coming to the market and help match you to your perfect home.
For home loan advice and an overview of where you stand prior to applying for a loan, get in touch with Shelley Stone from BOS Financial Services.
*Independent is not a financial advisor. The information contained is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any commitment of a legal or financial nature you should consider the appropriateness of the information having regard to your circumstances and needs and seek advice from a legal practitioner or financial or investment adviser.
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