The term LVR is an acronym for “Loan to Value Ratio” and is a calculation used in a lot of different forms of lending. Lending money to people for home loans will use the results of this calculations to work out how risky they think that the loan to give you is going to be.
Every lender that offers a secured loan will have different restrictions on how much that they will lend you. Even though you might be able to easily afford your repayments, or be a high income earner, this doesn’t mean that you can borrow as much as you want to.
What’s the difference in LVR between purchasing and refinancing?
There’s no difference in the overall calculations of the LVR when comparing between different loan purposes. What does change is how the value of the property is determined.
Purchasing a property
When you are purchasing a property, the value that is used in the calculations is worked out by one of two methods. The purchase price OR the value of the property that a certified valuer provides.
It’s important to note that a lot of lenders (but not all) will use the LOWER of these two values. It’s simply how they assess risk.
Refinancing a loan
When you are looking to refinance your home loan, the purchase price isn’t looked at in the transaction. You might have bought the property a long time ago and values change over time. If you’ve done any renovations or additions to the home then it’s value may have changed. This means that the purchase price isn’t a good indication of how much a home is worth.
How does a lender assess the value of your home? They use a certified property valuer to provide them with a independent valuation.
What’s the maximum LVR that I can have?
A good general rule to start with is to aim for an LVR of 80%. Most lenders will consider this a lower risk loan and provides you with lots of options when it comes to choosing a lender.
In some cases you might be able to go higher than this but it will depend on your circumstances. Loan that have an LVR of 90% or even 95% are available, but they might be more costly for you.
What about 100% LVR? Can I do this?
On your own, you won’t be able to do this. If you are looking to purchase a property, then your options on a 100% home loan are pretty limited. There are some “no-deposit” home loans out there though they will also require you to have a guarantor.
The better option is to see if you can have someone guarantee your home loan. If the guarantor is able to put a portion of their property as security as well, then the effective LVR comes down into acceptable risk limits for the lender.
Are my loan options restricted by my LVR?
They can be. Each lender has different limits on the LVR for different products and for different loan purposes. For example, you will be able to have a higher LVR if the loan is for an owner occupied purpose (ie Home you’re living in) and for an investment purpose (a home you rent out).
This difference can be quite significant, so it’s always important to check the options on your products before you choose your loan.
How is my property valued?
This question is pretty important one that we cover in a topic dedicated to it! Read more about property valuations here