LVR Formula | How to calculate Loan to Value Ratio

The Loan-to-Value Ratio (LVR) formula is a crucial concept for Australians looking to finance a property. LVR is calculated by dividing the loan amount by the property's value, expressed as a percentage, helping lenders assess risk and determine borrowing capacity. A lower LVR typically indicates less risk for lenders and may result in better loan terms for borrowers, while a higher LVR can lead to higher interest rates and additional costs such as Lenders Mortgage Insurance (LMI). Understanding LVR is essential for potential homebuyers and property investors, as it impacts their ability to secure financing and the overall cost of their loan.

The Loan-to-Value Ratio (LVR) is a crucial metric in the Australian property market, representing the relationship between the loan amount and the value of the property being purchased. It is expressed as a percentage and plays a significant role in determining how much a borrower can borrow from a lender.

When applying for a mortgage, lenders assess the LVR to evaluate the financial risk associated with lending to the borrower. A lower LVR indicates less risk for lenders, while a higher LVR suggests a greater risk, which can influence the terms of the loan, including interest rates and mortgage insurance requirements. Understanding LVR is essential for anyone looking to enter the property market, whether as a first-time home buyer or an investor.

What is the LVR Formula?

The LVR formula is straightforward:

LVR = (Loan Amount ÷ Property Value) x 100

The loan amount is the total sum a borrower seeks to borrow, while the property value is the current market value of the property being purchased or refinanced. This formula provides a quick way for both lenders and borrowers to assess the risk associated with the loan. For example, if a borrower wants to borrow $800,000 to purchase a property valued at $1,000,000, the LVR would be 80%, indicating that the loan is for 80% of the property's value.

Understanding the components of the LVR formula is essential for any prospective property buyer. The loan amount can vary based on factors such as deposit size and lender requirements, while property value can fluctuate based on market conditions and property appraisals. This dynamic nature of LVR underscores the importance of regularly evaluating your financial position and property market trends.

Importance of LVR in Mortgage Applications

Lenders utilise the LVR as a key indicator of risk when considering mortgage applications. A higher LVR means that the borrower is financing a larger proportion of the property’s value, which can lead to increased risk for the lender. This is because if the borrower defaults, the lender may struggle to recover the loan amount from the sale of the property, especially if property values decline. Typically, lenders will only allow a maximum of 80% LVR, although in some cases they may offer up to 90% or 95% with more stringent lending conditions, eg: higher interest rates, more extensive documentation requirements, and Lenders Mortgage Insurance.

On the other hand, borrowers with a lower LVR typically access more favourable loan conditions. With a lower LVR, lenders are more confident in the borrower’s ability to repay the loan, which can result in lower interest rates. Also, you will be able to avoid LMI when you borrow less than 80% LVR.

How to Calculate Your LVR

Calculating your LVR is a straightforward process and can help you understand your financial position when purchasing or refinancing property. Start by determining the loan amount you intend to borrow, then work out the property’s current market value, which can be done through a professional appraisal or market research.

Enter these figures into the formula LVR = (Loan Amount ÷ Property Value) x 100 will give you your LVR percentage.

Let's use an example: Pretend you are borrowing $700,000 for a property valued at $850,000, this is the calculation:

LVR = (700,000 ÷ 850,000) x 100

From this calculation the LVR is 82.35%. This would typically require Lenders Mortgage Insurance since the LVR is higher than 80%, unless you are in a profession with an LMI waiver.

It’s beneficial for prospective buyers to calculate their LVR before applying for a mortgage to gauge their borrowing capacity and assess the potential impact on loan terms. Regularly evaluating your LVR can also be helpful when considering refinancing or investing in additional properties. For those looking to improve their LVR, strategies such as increasing the deposit amount or enhancing the property’s value through renovations can lead to better lending conditions. Speak to a mortgage broker for advice on how much you can borrow for your next property purchase, by filling out the form below.

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LVR and LMI

The relationship between Loan to Value Ratio (LVR) and Lenders Mortgage Insurance (LMI) is significant for property buyers in Australia. LMI is a type of insurance that lenders require when a borrower’s LVR exceeds 80%, essentially protecting the lender against the risk of default. This can add considerable costs to the overall loan amount. LMI premiums can vary based on the lender, loan amount, and the LVR, so you need to factor this into your financial planning.

Understanding LMI is important for those considering property purchases, as it can affect your overall affordability. While some lenders may allow for LMI to be added to the loan amount, others require it to be paid upfront. Some banks also waive LMI for certain professions with stable incomes, such as doctors, lawyers, nurses, accountants and teachers. Read this article for a comprehensive list of the professions which are eligible for LMI waivers.

Conclusion

In summary, the Loan-to-Value Ratio (LVR) is a critical factor for Australians looking to borrow money for property purchases or refinancing. It provides insight into the risk associated with a loan and significantly influences the terms and conditions lenders offer. Understanding LVR, how to calculate it, and its implications on borrowing capacity and mortgage insurance are essential for anyone looking to navigate the complexities of the property market successfully.

By staying informed about LVR and its impact, property buyers can make better financial decisions and potentially secure more favourable loan conditions. For those seeking to optimise their borrowing potential, consulting with financial professionals or mortgage brokers can offer valuable insights and assistance in understanding LVR-related matters. Ultimately, a well-informed approach to LVR will empower borrowers to make smarter choices in their property investment journey.

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To get started on your journey of securing a home loan, fill in the form below, and an experienced mortgage broker will contact you about your personal situation. You can also call us directly on (02) 9188 9398.

Shaun Bettman

#1 Mortgage Broker

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