What is LVR?
What is LVR? Does LVR impact loan accessibility?
Loan to Value Ratio (also referred to as LVR) is the amount of money an individual is borrowing against the value of the property used as collateral for the loan. It is usually calculated in percentage. Lenders emphasize LVR when evaluating loan applications. Lower LVR reduces the risk faced by the bank, as such, there is a higher chance you will get better deals with a low LVR home loan.
How to calculate LVR?
Loan to Value Ratio is determined by dividing the loan amount by the property valuation or the real purchase price. The outcome is then multiplied by 100. For instance, let’s assume you are seeking a loan of $288,000, and the property you are using as collateral is valued at $360,000.
The LVR of the home loan will be computed as thus:
($288,000 loan ÷ $360,000 value of property) x 100 = 80% LVR
Which is appropriate, real purchase price or property valuation?
If the real purchase price and the property valuation are not the same, then the mortgage insurer and the lender retain the right to use the lower of the two to decide the LVR. This is more peculiar to an off-the-plan buy, where the value of the property might have dropped or risen since the purchase date. Another common situation that can cause a disparity between a bank’s valuation and the purchase price is when an individual buys the property from an acquaintance or family member at a reduced price. This is usually referred to as a favourable buy.
It is important to note that some lenders calculate the LVR through valuation only, and do not take the purchasing price into consideration. However, this is only possible if the sale agreement of the property was signed more than three months before the date the borrower applied for the loan. In addition, the majority of lenders also prefer the agreement to be over a year old. For example, if an individual purchases a property off the plan for $300,000. The property is valued at $360,000 when the unit is settled 12 months later.
In situations like this, most lenders will determine the LVR using the valuation of the bank. This may lead to a reduced Lenders Mortgage Insurance (LMI) premium or may mean that the individual does not require LMI. Individuals must understand that their valuation of the property might differ from the bank’s valuation of the same property! In most situations, the real value tends to be between the personal estimate and the valuation of the bank. To improve your borrowing power, certified lenders can be invited for a professional valuation of your property.
How do banks determine the LVR for a refinance?
If an individual decides to refinance a personal property, the lenders are at liberty to use their valuation of the property to determine the LVR. This is because the property might have been purchased a long time ago, thus, the amount paid at the time of purchase has become invalid. Renovations might have been carried out or the property market might have changed over time, this is why an independent valuation by the bank is preferable.
Do lenders always conduct property valuation?
No. Some banks will not conduct property valuations if certain criteria are met. Others might use a computer-generated valuation (AVM or Desktop) or drive-by valuation (restricted assessment), as opposed to the time-consuming and relatively expensive full valuation, that involves a physical check of the property. Most banks’ property valuation method depends on how high the LVR is and the overall risk associated with the loan application.
Will my property require a valuation?
Generally, the bank will not conduct property valuation and will use the amount on the sales agreement to determine the LVR if a loan applicant meets the following conditions:
- The loan is at or less than 80% LVR.
- The property is being purchased.
- The loan is below $800,000.
- Prove of income is provided.
- The property is located in the capital city or a major town.
- The purchase is via a certified real estate company.
- The property is not off the plan or new.
- Loan applicants do not share a personal relationship with the seller.
What is the highest LVR an individual can borrow?
Banks are able to determine the Loan to Value Ratio (LVR) an individual can borrow by considering the amount of home loan needed, property location, client’s credit history, and the kind of loan the individual wants. Basically, applicants with full doc (with evidence of income) can receive up to 80 percent LVR. However, applicants with advanced documentation can borrow between 90 percent to 95 percent LVR! Applicants with limited documentation (self-employed individuals that do not have evidence of income) can borrow between 60 percent and 80 percent LVR depending on their financial position.
Can I borrow 100% LVR?
Borrowers applying for loans at a high LVR loan can support their application with a guarantor. The guarantor can be an acquaintance or family member that owns and have equity in another property. To secure the loan, guarantors must use part of their property as security for a certain percentage of the home loan the borrower is requesting. This gives borrowers access to 100% LVR! If the value of the property rises or the borrower makes extra repayments on the loan, the guarantor might no longer be liable. Since the LVR will be low enough for the banks to approve it, without requiring extra security. It is impossible to borrow 100% LVR in the absence of a guarantor. However, borrowers can access other no deposit home loans that do not require them to have a personal deposit.
When will LMI be charged?
Lenders Mortgage Insurance (LMI) applies to home loans with an LVR that is greater than or equal to 80%. Home loans within this range are regarded to be high-risk LVR by most lenders. This is because defaulting on the mortgage will give the mortgage insurer the impetus to charge the lender a risk fee that is regarded as an LMI premium. For low documentation loans, the borrower does not possess the crucial documentation needed to ascertain their income and earnings. This puts the lender at a higher risk, thus LMI is needed when the value of the property is greater than or equal to 60%.
Which LVR is regarded as ‘high risk’?
Primarily, lenders regard loans with an LVR above 80% of the property value as high risk. As such, Lenders Mortgage Insurance (LMI) is required for loans that are equal to or greater than 80% LVR. The introduction of LMI reduces the risk associated with the loan, as such, lenders can grant loans without the fear of losing their money. LMI calculators have been created to help estimate the LMI premium borrowers will pay if their loan is above 80%.
Why would banks stop LVR?
Banks use the Loan to Value Ratio to mitigate the risk associated with the loan applications they receive. The bank might restrict an individual’s maximum LVR to reduce the risk of his or her home loan if such a person is deemed a high-risk borrower. For instance, if you apply for pre-approval to purchase a home for $500,000 using a loan of $475,000 at 95% LVR. The presence of default on your credit file might restrict your borrowing capacity to 80% or 90% LVR. The lender can also reduce the LVR if the property in question cannot be easily resold.
Borrower’s LVR will be restricted if the property in question:
- Is relatively unconventional
- Located in a remote place.
- Have certain limitations likes serviced apartments, heritage-listed properties, and display homes
- Might take over six months to sell or
- A combination of the conditions above