You’ll hear the term Loan-to-Value Ratio a lot when applying for and exploring home loans. It’s important to understand what it is and how it applies to you as it may impact how much you can borrow.
What is Loan to Value Ratio (LVR)?
Loan-to-Value Ratio otherwise known as LVR is the amount you need to borrow calculated as a percentage of the value of the property you’re looking to buy.
The bigger your deposit, the lower your LVR will be.
How is LVR calculated?
When buying a property, to calculate your Loan-to-Value Ratio, you divide your loan amount by the purchase price or the valuation of the property you’re buying, whichever is the lower value of the two. This is expressed as a percentage.
For example, if you were going to borrow $500,000 and the property price was $750,000 you would calculate it as below.
($500,000 loan value ÷ $750,000 property value) x 100 = 66.67% LVR.
What does it mean for my home loan?
LMI is usually a one-off payment and protects the lender. The higher your LVR is, the higher your LMI will be. While you will pay the LMI premium, it’s important to remember it only protects the lender, not you as a borrower.
So that you can avoid paying LMI and reduce your LVR, you should aim to save as much of a deposit as you can over 20%.
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