The abbreviation for Loan to Value Ratio for short is LVR. What it means is, it is the figure where the bank or creditor rates you the borrower, that you are able to pay the loan back without problems.
The money that you want to acquire is called the Loan.
The worth of the house that you want to refinance or purchase is the Value.
LVR is a percentage. It is basically the total loan amount that you need to borrow.
I’ll give you an example, you want to buy a house that is $600,000. You already have your hard earned $300,000 that you have saved over the years. Now you want to use that to purchase that house. So you only need the bank or the lender another $300,000 to add on your $300,000 cash.
The formula for LVR is $300,000(the amount you want to borrow) divided by $600,000(the amount value of the house) (x)times 100 = 50%.
LVR = 50%. This value also says about the Loan’s Risk Factor to the Lender. Up to 80% the lender or banks are still ok with it. But if it is over 80%, it will be subject to what you call Lenders Mortgage Insurance, LMI for short.
The insurance that you need to make payment to the lender as a security for them is the LMI. The LMI that is needed depends on the LVR. LMI will be higher as the LVR goes higher than the 80%. Majority of the lenders will be glad to help and lend you up to 90% or will even give you up till 95%. LMI can now become a bit expensive, but the long term benefit will end up cheaper once you started moving in your own home.
To Understand the Concept More. Here are Answers to the most asked Questions about this topic
Most of these are already explained above. But i thought put them in question and answer format.
The Effect of LVR on your power of borrowing:
LVR stands for Loan to Value Ratio, and it is also known as LTV.
What is LVR?
As the abbreviation tells the whole story by the word LOAN, so let’s describe it further. Loan to Value Ratio is the percentage of money you borrow to buy a home and is used to assess your risk as a borrower. Before, approving the application of your loan, lenders will calculate your LVR to determine if you are eligible to approve for loan or not.
When giving you a loan, a lender will check the value of your property, and also see your bank deposits to determine how much you are in need to borrow.
For this calculation, a lender will use the formula which can be described as that the buyer will subtract your deposit amount from the purchase price. Then, divide the remaining amount to the actual value of the property and multiply it by 100. Let’s take an example to make it understanding for you. If you want to purchase a property which worth $500,000, and you have $100,000 deposit saved. Then you will need to borrow $400,000.
So, here is the formula: (LOAN ÷ PROPERTY VALUE) x 100
Put the above values in the formula given: (400,000 ÷ 500,000) x 100 = 80% LVR
Do Lenders use the valuation or purchase price to Calculate LVR?
In order to determine the LTV, the lender and the loan insurer will use the lower of the two whether a purchase price or value price. It usually happens at the time of contract signing that the selected value sometimes increased or decreased. Also, when a buyer is purchasing a property off of their family at a discounted price, then usually the costs of bank valuation and purchase price gets different, and this purchase is known as “favourable purchase.”
The lenders we are working with uses value price to calculate the LVR. However, it is only in the condition when a buyer has signed the property purchasing contract before three months when applying to the loan. In some cases, the lenders demand the 12 months old contract. In few cases, lenders use the bank valuation to calculate the LVR. For example, you have purchased a home for $400,000 and after 12 months period, the value increases by $60,000 ($460,000). Therefore, the use of bank valuation to calculate the LVR will result you for no need of LMI or maybe a lower LMI, incase.
LVR For A Refinance: HOW BANKS CALCULATE IT!
Lenders use the valuation of the property for the calculation of LVR in case f refinancing the property. The reason is simple that the property you may have just purchased for the price is no more relevant to market value. Therefore, bank valuation is the better and compatible option.