Back to basics: what is loan-to-value ratio

If you’ve just begun looking into buying property and are figuring out how to get a home loan, it can all be a little overwhelming. You may be forever fielding calls from overeager estate agents, perhaps you’re struggling to adjust to a more frugal mortgage-friendly lifestyle, and you’re probably bamboozled by the all the jargon and technicalities involved.

Loan-to-value ratio, or LVR, may be a confusing term for those new to the home loan game. With this in mind, let’s have a close look at what exactly it means and more importantly what it may mean for you.

LVR: A simple definition

At its most basic, your loan-to-value ratio is the portion of your home’s value that you have borrowed in order to purchase it. To work this ratio out you’ll simply need to divide the amount remaining to be paid on your mortgage by the value of your property.

Lovely as that definition may be it may not mean much to you at face value.

What does your LVR mean for you

A lower loan-to-value ratio, means you’ve borrowed less money or have paid more of your mortgage off, which means you’ve got more equity in your home and that your mortgage repayments should be lower. Naturally, the opposite is true if you have a higher loan-to-value.

With this in mind, placing a larger deposit on your home is advisable as it will mean your loan-to-value ratio is lower, your investment is worth more straight off the bat, and that your loan should be cheaper to service.

If you borrow more than 80 per cent of your home’s value then you may incur a few extra costs, including lenders mortgage insurance.

Lender’s mortgage insurance (LMI)

No need to despair due to jargon overload – LMI is a simple concept and knowledge of it may be essential to being a successful borrower.

It’s a fee that your lender will charge you if you’re deposit is less than 20 per cent (which identifies you as a high risk borrower). It’s used by your bank as an insurance policy, in the unlikely event that you default on your loan payments.

Your Investment Property’s LMI calculator can help us get an idea of how much this figure may be. If you purchase a home at $500,000 and borrow 90 per cent of it’s value, your lenders mortgage insurance will cost you $6,300. If it’s for your first home it will cost closer to $7000.

If you’ve got more questions, or need a helping hand with your home loan, get in touch with us today.