If you’re looking into home finance, LVR is a really important term to understand. It’s a measurement all banks use when assessing your home loan or refinancing application – so to cut the confusion, we’re here to answer some common LVR questions.
LVR = loan to value ratio. You might see it referred to as LTV (loan to value) but LVR is more common. The loan to value ratio is the percentage of your property’s value you plan to borrow. i.e. the bigger your deposit, the lower your LVR and the less you’ll need to borrow.
What’s a good LVR?
The higher the ratio (say 90 or 95%), the riskier the loan, which is why many banks (including us) will only lend a maximum of 80% of the total property value. Some banks might loan more than 80% and have you pay LMI (lenders mortgage insurance). LMI can add tens of thousands to your loan, and we believe it’s an extra expense you can do without.
How do I calculate LVR?
Say you have $75,000 saved and a $500,000 property in mind. What you need to do is calculate the loan amount – what you’re planning to borrow – divided by the property value to ensure you’re hitting 80% LVR (for a UBank UHomeLoan).
It’s calculated using the LVR formula:
LVR % = (Loan Value ÷ Property Value) x 100
In this scenario you're looking to borrow a loan amount of $425,000. When you divide that number by a property price of $500,000 however, you're coming in at an LVR of 85%.
($425,000 ÷ $500,000) x 100 = 85%
In order to decrease the LVR, you need to either dedicate more time to saving a deposit of $100,000, a loan amount of $400,000 and an LVR of 80% or you need to set your sights on a property at a lower value.
What’s the difference between LVR for property purchasers and refinancers?
Depending on whether you’re purchasing a property or refinancing, there are different things to consider when calculating LVR.
- LVR for property purchase – this comes down to market value and the sale price. But remember to factor in additional costs of purchasing a new property (like stamp duty) into the total amount you’re intending to borrow.
- LVR for refinancing – here, you’ll have the lender provide an external valuation of your property to see how much it has fluctuated over time. If you’re after a lower rate but also want to take out more money for a wedding, growing family or renovation – keep in mind the value of your property may have changed and could affect your borrowing power.
You can play around with our fees and deposits calculator to work out just how much money you need to reach 80% LVR. And if you’ve successfully reached it, what are you waiting for? Head on over to our application page and start your home loan journey today.