If you’re taking the leap and buying your first home, understanding home loan concepts can seem daunting. We’ll run through the Loan to Value Ratio (LVR) and discuss what it means when you’re organising your home loan.

What is LVR?

The Loan to Value Ratio is the amount you are borrowing, represented as a percentage of the value of the property you’re buying. The bigger your deposit, the lower the loan to value ratio will be.

What’s not included in the loan amount when calculating LVR?

It’s important to remember that upfront costs such as conveyancing and stamp duty aren’t included in the loan amount for LVR calculations.

How to calculate LVR?

The Loan to Value Ratio is calculated by dividing the loan amount by the purchase price or valuation of the property you’re buying, expressed as a percentage.

For example, let’s say that you’d like to borrow $450 000 and the property price is $600 000.

The LVR of the home loan would be calculated like this:

($450 000 loan ÷ $600 000 property value) x 100 = 75% LVR

How is the property value assessed when calculating the LVR?

If the purchase price is different to the bank valuation then the lender will generally use the lower of the two to determine the LVR.

Impact of the LVR on your home loan

Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower is the risk to the bank. Generally, lenders consider loans with a Loan to Value Ratio over 80% of the property value to be a higher risk.

The Loan to Value Ratio that banks will allow you to borrow depends on the home loan amount you need, the location of your property, your credit history, your income and employment history and the type of loan you’re applying for.

If your LVR is greater than 80%, you’ll generally need to get Lenders Mortgage Insurance (LMI).

Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.

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