LVR Loan to Valuation Ratio
When you apply for a mortgage, your lender will calculate the Loan to Valuation Ratio (LVR) of your loan. This is an important part of their assessment criteria. The higher your LVR, the higher the risk to the bank in the event that you default on the loan.
The LVR is a simple formula based on the loan amount divided by the value of the property. It is expressed as a percentage. Please note that in most cases the purchase price of a property and the bank valuation will be the same, however if there is a difference then the bank will use the lower of the two to calculate your LVR.
Example LVR calculations
If you are applying for a mortgage of $250,000 on a property valued at $300,000 then your loan will have a 83.33% LVR. This is calculated as 250000 / 300000 * 100 = 83.33. In this example you may need to pay LMI as your loan is for more than 80% of the property value.
As another example, if you are buying a property off of a family member and the purchase price is $500,000, the value may be slightly different as this is an off the market transaction. If the bank’s valuer worked out the property to be worth $600,000 then the lender will use $500,000 in their LVR calculation as it is the lower of the purchase price and valuation.
If you needed to take a loan of $450,000 on the above example then your mortgage would have a 90% LVR. This is calculated as 450000 / 500000 * 100 = 90.
Please note that some lenders can use the actual valuation rather than the purchase price, however this is rare and you must be in a strong financial position.
You can use this LVR calculator to work out the LVR for your loan.
When does LMI apply?
Lenders Mortgage Insurance will apply if your loan is over 80% of the property value. You can use this mortgage insurance calculator to work out how much your premium would be.
The banks get insurance on your loan if you borrow over 80% LVR because there is a significant chance that they will lose money if you are unable to make the repayments. The LMI premium is charged to you, the borrower. The higher your LVR & loan amount then the higher your LMI premium will be.
Not every lender has the same LMI premiums, they may use different insurers and some have discounts or LMI waivers available for their best customers.
What is the Base LVR & Final LVR?
Some lenders may allow you to add your LMI premium to your home loan. For example if you are borrrowing 95% LVR and your LMI premium was 2% of the loan amount then the lender may actually give you a loan for 97% LVR.
This is known as LMI capitalisation, and is not available from every bank. The base LVR is the LVR of your mortgage before the LMI premium is capitalised, in this case the base LVR is 95%. The final LVR is the LVR after your LMI premium has been capitalised, in this case the final LVR is 97%.
Find out more about LVRs
If you would like to learn more about the LVR of your home loan then refer to this page on LVR by the Home Loan Experts. They are specialist mortgage brokers and they can assist you with any further questions.
