When you’re preparing to buy your first home, you’ll encounter lots of jargon - the Loan-to-Value Ratio (LVR) being one of the most important concepts. LVR not only determines how much deposit you need but also plays a key role in your loan’s structure and the costs you’ll need to consider along the way.
This guide simplifies everything you need to know about LVR, from how it’s calculated to how it affects your path to homeownership. Along the way, we’ll share practical tips to help you manage your LVR more effectively and highlight how Horizon Bank’s local experts can guide you every step of the way.
What is the Loan-to-Value Ratio (LVR)?
LVR stands for Loan-to-Value Ratio. It’s a way lenders assess the risk of providing a loan by comparing the amount you want to borrow against the value of the property you wish to purchase.
How is LVR Calculated?
The formula for calculating LVR is straightforward:
LVR = (Loan Amount ÷ Property Value) × 100
For example, if you’re buying a property valued at $500,000 and need to borrow $400,000, the LVR would be calculated as follows:
(400,000 ÷ 500,000) × 100 = 80% LVR
This means the loan equates to 80% of the property’s value.
Why Do Lenders Care About LVR?
Lenders use LVR to gauge how much risk a loan carries. Generally, the lower your LVR, the lower the risk for the lender. Borrowing more with a higher LVR increases the lender’s exposure, which may lead to additional costs for the borrower, such as Lenders Mortgage Insurance (LMI).
Why is LVR Important for First Home Buyers?
For first home buyers, understanding LVR is essential because it directly affects how much deposit you’ll need and influences the overall affordability of your home loan.
Impact on Deposit
Your LVR determines the minimum deposit you’ll need to secure a home loan. Lenders typically require at least a 20% deposit for an LVR of 80% or lower. If you borrow more than 80% of the property’s value, your LVR rises, and you may be required to pay for LMI, discussed further below.
For instance:
LVR of 80% means a 20% deposit is required. On a $500,000 property, this would equal $100,000.
LVR of 90% would mean a smaller deposit of $50,000 on the same property, but would likely result in LMI and higher monthly repayments.
How LVR Affects Borrowing Power
LVR can also influence your borrowing capacity and the types of loans you qualify for. A lower LVR generally places you in a stronger financial position, making it more likely you’ll secure favourable terms, such as lower interest rates. A higher LVR may limit your options and add costs.
The Relationship Between LVR and Lenders Mortgage Insurance (LMI)
LMI is a type of insurance that protects the lender, not you, in case you’re unable to repay your loan. It’s typically required when your LVR exceeds 80%.
How LMI Works
Higher LVR loans are considered a bigger risk. To mitigate this risk, lenders require borrowers to contribute to LMI. The cost of LMI depends on the loan size and your LVR percentage. The higher your LVR, the more expensive your LMI will be.
Example of LMI Costs
On a $500,000 property with an LVR of 90% (loan amount of $450,000), LMI could add thousands to your upfront costs or be capitalised (added to your loan).
Tips for Managing Your LVR Effectively
Reducing your LVR before applying for a loan can lead to better outcomes, from avoiding LMI to securing competitive interest rates. Here’s how you can do it effectively:
1. Save for a Larger Deposit
The simplest way to lower your LVR is to save for a bigger deposit. This not only brings down your borrowing amount but also puts you in a stronger negotiating position for loan terms.
2. Consider the Property Value Carefully
Choose a property within your budget to keep LVR manageable. Overextending yourself on a higher-value property could push you into a higher LVR bracket, increasing costs.
3. Leverage First Home Buyer Incentives
Take advantage of Australian government grants or programs, such as the First Home Owner Grant, to help boost your deposit and lower your LVR.
4. Seek Guidance from a Local Lender
Working with Horizon Bank’s expert team ensures you are informed on your loan LVR, you understand your borrowing capacity, and can navigate the first home loan process with confidence.
5. Build Financial Resilience
Maintain a strong financial profile by managing debts and showing consistent savings habits. This can highlight your reliability as a borrower and may help during the approval process.
6. Explore Smart Repayment Options
Consider strategies like making fortnightly repayments instead of monthly to pay off your loan faster and gradually reduce your LVR over time.
Take Control of Your LVR with Horizon Bank
Understanding the Loan-to-Value Ratio (LVR) is crucial for first home buyers. From determining your deposit size to influencing loan approvals and additional costs like LMI, LVR affects nearly every aspect of your home loan experience.
At Horizon Bank, we’re here to make the process simpler and more transparent. Our local, customer-first approach ensures you’ll always have access to relevant information from people who understand the Australian market and your unique situation.
Your first home is closer than you think! Speak to one of our local lending experts today to better understand your LVR and discover how Horizon Bank can help you achieve your homeownership goals. Contact us now or visit our First Home Buyer Loan page for more information.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant General Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.
