When you apply for a home loan, lenders need to calculate your borrowing power. So, they use a ratio to express your financial position as a single figure.
Conveniently, we can help you calculate that percentage, so you roughly know where you stand before starting the loan application process.
But first, let’s explain why Loan to Value Ratio (LVR) is important.
A Loan to Value Ratio is the amount you need to borrow, calculated as a percentage of the property’s value – which the lender ultimately assesses. Loan to Value Ratio is important because it is often the key factor considered in the decision to approve or deny your home loan application.
N.B. For this example, we’ve excluded additional costs like legal fees, stamp duty and LMI (which we explain below) from the LVR calculation. However, when you do your own calculations, you might want to add them in, as these may be included in the amount you borrow.
Use our LVR calculator to find out how much of a deposit you need to get an 80% LVR. You can also use the LVR calculator to see what property price you can manage based on your current savings. Play around with the numbers and see what you come up with.
Below 80% is generally an optimal LVR score, anything above 80% and lenders may consider you too risky. To negate that risk, they’ll often require you to pay what’s called Lenders Mortgage Insurance (LMI).
LMI is protection for the lender (not you) if you can’t repay your loan (also known as defaulting). Although this fee may help you get into the market quicker, it can be expensive. If you want to avoid LMI, you can always choose to hold off, and save for a bigger deposit.
If you have a high LVR score (well above 80%), you can get what’s called a ‘guarantor’ loan. Typically, a family member will become your guarantor and use their equity to help you get that 20% deposit. However, the bank needs to ensure your guarantor has sufficient equity in their own home (i.e. they paid off enough of their mortgage) and the means to take over loan if needed.
Since guarantors are responsible for loan repayments if you can’t pay, you should carefully consider this option as it could risk your relationship.
Additionally, the Australian Government has the First Home Loan Deposit Scheme (FHLDS) and other grants you may be eligible for. This initiative allows eligible homebuyers to build or purchase a new house with a deposit as low as five per cent, with the Government covering the rest. If this appeals to you, check your eligibility online.
In addition to the price of the property, there are somewhat unexpected costs to factor in. They include:
N.B. You may need to factor in additional costs to the ones listed above.
When you begin the loan approval process, lenders will not only look at your LVR to determine your ability to make repayments; they’ll also consider other risk factors including the location of your property, your credit history, current income, employment status and monthly expenses.
While Lenders Mortgage Insurance can help prospective homebuyers enter the market quicker, only you will know if it’s better to buy now or wait and save.
If you need help with budgeting and saving, try our home loan calculators or read our article on some top saving hacks.
You can also learn more about home loans with our dedicated home loan FAQ page.
If you entered your loan with an above 80% LVR, you may want to consider refinancing when your LVR drops below 80%. Why? Because you might be on a loan with higher interest rates (set by your lender to offset the risk).
When refinancing, your lender or new lender will determine the value of the property as the purchase price or market value may be inaccurate.
Are you ready to apply for a home loan? First of all, congratulations! Buying a home is a massive milestone in life and a dream we’d love to help you achieve.
First, compare a range of home loans from multiple trusted providers with us for free. Our service allows you to compare home loan quotes side-by-side to evaluate rates, fees, features and more. Let’s begin, compare now!
