What does loan-to-value (LVR) mean?

Hi, future homeowners!

So you're ready to take the plunge into the property market but feeling a little overwhelmed by all the jargon?

Don't fret! Today, we're diving into one of the most important yet misunderstood terms in the mortgage world: Loan-to-Value Ratio, or as the cool kids call it, LVR.

So, what Is LVR?

Simply put, LVR is a percentage that tells you how much of a property's value you're borrowing from a lender. Imagine you're buying a $500,000 house. If you've got a $100,000 deposit, your loan amount would be $400,000. So, your LVR would be 80%:

LVR = (500,000 ÷ 400,000​) × 1 00 = 80%

Why Should You Care?

You might be wondering, "Why does this LVR thing matter to me?". Well, it's all about risk management. Lenders use this nifty little number to gauge how risky you are as a borrower. The lower your LVR, the safer you appear to lenders, which could translate into a lower interest rate for you. (Who doesn't love saving money?!)

The Magical 20% Rule

If you can hit an LVR of 80% or lower, you're in the sweet spot. Why? Because this usually means you can avoid paying what's known as Lenders Mortgage Insurance (LMI). This is an extra cost that protects the lender—not you—if you default on the loan. While LMI may seem like an extra cost, sometimes it can actually be a lifeline for getting into a high-demand housing market when your deposit falls short.

How to Lower Your LVR

There are several ways that you can achievce this but here are three of the most common:

1. Save More: The more you save for a deposit, the lower your LVR. Simple, right?
2. Buy a Cheaper Property: If properties are flying off the market, consider a less expensive property to lower your LVR.
3. Guarantor Loans: If you're lucky to have generous parents or relatives, they can act as a guarantor to help you lower your LVR.

Knowledge is Power!

Understanding your LVR is like mastering the secret handshake of the mortgage world. It opens doors to better interest rates and could save you a bundle in the long run.

Empowered by your newfound knowledge? Click here to book a meeting and let's discuss how I can assist you in securing your dream home.

Until next time, happy house hunting 🏡 ,

Jo