The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘loan to value ratio’. Here’s what it means.
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the loan-to-valuation ratio (LVR) is one of the most important considerations.
What does it mean?
In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80 per cent of the property value, making your LVR 80 per cent.
LVR is important because different lenders and loan types have different maximum LVRs, and some lenders will only lend up to a certain LVR for mall properties or properties in certain areas.
How does this effect you?
If you are borrowing up to 80% of the purchase price of an owner occupied property in most cases the lender will not require you to pay for lenders mortgage insurance (LMI). The exception is with Low Doc loans. As a general rule lenders will require you to pay LMI on LVR’s over 60% when applying for a low doc product. Again, it all comes down to the risk to the lender or bank.
Some lenders have been know to offer full doc products where they will allow you to borrow up to 85% of the purchase price without requiring LMI. In some cases the lender will apply a higher rate or additional fees to mitigate the risk although this isn’t always the case.
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Until next time, Stay Savvy…