Loan to Value Ratio (LVR)
The Loan to Value Ratio (LVR) is a key metric used by lenders to assess the risk associated with your home loan. It represents the percentage of the property’s value that you’re borrowing. A higher deposit results in a lower LVR, indicating lower risk for the lender.
To calculate your LVR, divide the loan amount by the property’s purchase price or valuation and express the result as a percentage. For example, if you’re borrowing $350,000 for a property valued at $500,000, the LVR calculation would be: ($350,000 ÷ $500,000) x 100 = 70% LVR.
Lenders typically use the lower of the purchase price or bank valuation when assessing the property value for LVR calculation. LVR significantly influences your loan application assessment, with LVRs exceeding 80% often viewed as higher risk by lenders.
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is a type of insurance that protects the mortgage lender in the event of borrower default. It’s typically required by lenders when the borrower’s deposit is less than 20% of the property’s value, corresponding to an LVR exceeding 80%.
It’s important to note that LMI protects the lender, not the borrower. Borrowers usually pay the LMI premium, either upfront or as part of their mortgage payments. Factors such as loan amount, LVR, and insurer policies influence the cost of LMI.
How to Avoid Lenders Mortgage Insurance
Borrowers can avoid LMI by having a deposit of at least 20% of the property’s value, corresponding to an 80% LVR. This demonstrates to lenders a lower risk of default. Other options include having a guarantor, accessing home guarantee schemes, or working in stable, high-paying professions allowing borrowing up to 90% LVR without LMI.
Impact of Refinancing on LMI
When refinancing, LMI may apply again if the LVR remains above 80%. However, paying off the mortgage faster, increasing property value through renovations, or having a family member act as a guarantor can help reduce LVR and avoid LMI.
At Loanfi Finance and Mortgage, we guide our clients through the complexities of LVR and LMI, helping them navigate the home loan process with confidence and clarity. Contact us today to learn more about how we can assist you in achieving your homeownership goals while minimizing costs and risks associated with LMI.