What is LVR?

LVR stands for Loan to Value Ratio. In real terms it is the way the lenders work out the risk you pose to them as a borrower.

Loan: This is the amount you wish to borrow.

Value: This is the value of the property you wish to buy or refinance.

The loan to value ratio is the loan amount as a percentage of the overall value of the property.

A case study

For example, you want a loan of $300,000 to buy a house worth $600,000. You have the remaining $300,000 in savings to cover the difference. The loan amount is only 50% of the value of the house. ($300,000 divided by $600,000 times 100 = 50% ). Your LVR is 50%.

The loan amount as a percentage shows the risk factor to the bank. Banks are happy to lend up to 80%. Anything over 80% LVR (Loan to value ratio) will incur Lenders Mortgage insurance (LMI).

What is LMI

LMI is an insurance you will pay to protect the lender you borrow from. The higher the loan to value ratio over 80%, the higher the LMI component.

Most lenders are happy to lend up to a 90% LVR for investment purchases. Others will go up to 95% for Owner Occupied Purchases.

Although LMI can be quite hefty, it may also be cheaper in the long run. This is because you can get into your home sooner (see my blog on LMI).

Speak to a broker

If you have minimal savings and your earning capacity is quite good then see your broker first. There are some great incentives for first home buyers. These incentives can save you thousands in LMI and the government can help too.

You can read about the First Home Deposit Scheme on the government website

LMI is explained well by the Insurance Council

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