The Loan to Value Ratio, commonly known as LVR, is a pivotal metric in the realm of real estate financing. In essence, it represents the percentage of the property’s total value that you are aiming to borrow. A higher initial deposit equates to a lower LVR. In this article, we will delve deeper into the concept of the Loan to Value Ratio and its profound significance when navigating the labyrinth of home loan arrangements.
Exclusions from LVR Calculation
Before delving into the intricacies of calculating LVR, it’s crucial to grasp what isn’t considered in this formula. Upfront costs, such as conveyancing fees and stamp duty, are not factored into the loan amount when determining the LVR. This exclusion highlights the importance of a substantial down payment when aiming for a lower LVR.
Crunching the Numbers: How to Calculate Your LVR
Calculating your Loan to Value Ratio is a relatively straightforward process. You simply divide the loan amount by either the property’s purchase price or its current valuation, expressing the result as a percentage. To illustrate this, let’s consider an example:
Imagine you seek a loan of $450,000 to acquire a property valued at $600,000. Here’s how you’d calculate the LVR:
($450,000 loan ÷ $600,000 property value) x 100 = 75% LVR
This calculation showcases that your LVR, in this scenario, stands at 75%.
Property Valuation Dynamics in LVR Calculations
In the realm of LVR, the property’s value is a cornerstone. If the purchase price diverges from the bank’s valuation, lenders typically use the lower of the two figures to determine the LVR. This practice ensures a conservative approach, aiming to minimize potential risks associated with the loan.
Impact of LVR on Your Home Loan Journey
Lenders accord considerable weight to the LVR when scrutinising loan applications. In the eyes of financial institutions, a lower LVR translates to a lesser degree of risk. As a general rule, loans characterized by an LVR exceeding 80% of the property’s value are categorized as higher risk, which can affect the terms of your loan or even your eligibility.
The specific LVR that banks are willing to entertain hinges on a multitude of factors. These include the desired loan amount, the location of the property, your credit history, income and employment history, and the nature of the loan you intend to secure. It’s essential to understand that a higher LVR might necessitate the acquisition of Lenders’ Mortgage Insurance (LMI), adding an additional cost to your home loan.
Beyond its implications for loan approval, LVR also influences your borrowing capacity and the interest rate you can secure. Lower LVRs often lead to more favorable borrowing terms, including lower interest rates and potentially reduced fees.
Strategies for Managing Your LVR
To improve your LVR and enhance your loan prospects, consider the following strategies:
- Increase Your Deposit: A larger initial deposit reduces the loan amount and lowers the LVR. Saving diligently before purchasing a property can significantly impact your LVR.
- Property Valuation: Optimize your property’s value through renovations or improvements, which can positively affect your LVR.
- Loan Repayments: Making extra repayments on your loan can expedite the reduction of your LVR over time.
In conclusion, the Loan to Value Ratio is a pivotal metric in the world of home financing. Understanding how it is calculated and the factors that influence it can empower you to make informed decisions when securing a home loan. A lower LVR not only increases your chances of loan approval but also opens the door to more favorable lending terms, making it a crucial aspect of your property purchase journey.