Home loan-to-value ratio (LVR) explained
When discovering how much you can borrow, you’ll likely hear the term ‘loan-to-value ratio’, or LVR. Here’s what it means, and how it directly affects Lenders Mortgage Insurance costs.
Essentially, your LVR percentage is your loan amount divided by the bank’s valuation of your property. It’s used by lenders to work out the level of risk before offering a home loan.
LVR and your deposit
While homebuyers may tend to think in terms of how much deposit they have and ‘property prices’, banks tend to talk about LVR and their assessment of the ‘value’ of the property. So when working out your LVR, remember to base it on the bank’s valuation which is done at full approval, rather than the price you’re prepared to pay.
A lower LVR means less risk for us
When you increase your deposit, you could lower your LVR. This means you’ll own a higher percentage of your property and your repayments could be lower.
A lower LVR means less risk to the bank too. Let’s say a borrower could no longer make repayments, and the bank had to sell the property. With an LVR below 80%, there’s less risk to the bank, as the property’s market value is more likely to cover the balance of the loan.
An LVR over 80% means there’s a higher risk that the bank wouldn’t recover the full loan amount, you’ll likely need to pay Lenders Mortgage Insurance (LMI) to offset the higher risk to the bank.
Lenders Mortgage Insurance, for an LVR over 80%
Generally, if your deposit’s less than 20% it means your LVR’s over 80%, and you may have to pay LMI. Bear in mind, LMI insurance protects the lender, not you. If you default on your home loan and your property sells for less than what you owe, you’ll still be liable to pay the shortfall.
How to calculate and reduce your LVR?
Let’s say you want to buy a place for $510k, the bank valuation is $500k, you have a $60k deposit and want to borrow $450k. You’ve also factored in other costs, like stamp duty, LMI and legal expenses. We’ll use the bank valuation – not the purchase price – in the calculation of your LVR.
Example:
- Dividing $450,000 by $500,000 will give you 0.9
- Multiply by 100 to get a percentage (0.9 x 100 = 90%)
- Your LVR will be 90%.
With 90% LVR, you’ll need to pay LMI costs and your loan might have a higher interest rate. But if you borrowed only $400k and increased your deposit to $110k, you’d bring your LVR down to 80%.
Example:
- Dividing $400,000 by $500,000 will give you 0.8
- Multiply by 100 to get a percentage (0.8 x 100 = 80%)
- Your LVR will be 80%.
A guarantor can help.
Saving a 20% deposit can take years, especially if it’s your first place. But there could be a way for your family members to help you buy earlier, by acting as a guarantor for part of your home loan. It’s called the BankSA Family Pledge^, and it could help you reduce or avoid paying LMI by reducing your LVR.
Bear in mind a guarantor is liable for the amount specified in the Family Pledge guarantee. Their ability to borrow may be reduced if they agree to act as a guarantor. It is a promise to pay BankSA the amount they nominate to guarantee. If the borrower does not pay the loan, if you do not have the cash to pay BankSA if asked, their house may be sold to cover it. Guarantors will need to read and understand the full terms of the guarantee and seek independent legal advice before signing it.
Here’s more on our Family Pledge.
How to get a bank valuation
There’s a difference between the market value (which is the price you pay for the property) and the bank’s valuation, which is influenced by things like location, property attributes, zoning areas, public transport and schooling.
Once you’ve applied for your home loan and you’re looking for full approval, we’ll arrange for an online bank valuation based on similar sales and local property market trends. If need be, we’ll arrange for an on-site valuation too. For private sales we can organise a bank valuation during the cooling off or finance period, so you’ll know if there’s any shortfall you need to cover. If it’s an auction, talk with us before bidding, as your bank valuation might only happen after the auction.
In summary
Your loan-to-value ratio directly affects what we can lend to you:
- Your LVR is your loan amount divided by our property valuation
- The higher your LVR, the higher your loan insurance costs (LMI) might be
- You’ll likely pay loan LMI costs if your LVR’s over 80%
- Talk with us about a bank valuation before you buy or bid.
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A home loan expert will call you once you have submitted your application to talk through next steps.
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Important information
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.
^Family Pledge Credit criteria, fees, charges, T&C's apply. Your Australian family members will be required to seek independent legal advice before offering their home to guarantee a loan.
1. Credit criteria apply to the assessment of the adequacy of any proposed guarantee limit.
2. Owner-builder applications are excluded. Other exclusions may apply.
LVR stands for the initial loan to value ratio. LVR is the amount of your loan compared to the Bank’s valuation of your property offered to secure your loan expressed as a percentage. Home loan rates for new loans are set based on the initial LVR and won’t change during the life of the loan as the LVR changes.