Loan-to-value ratio is the term that describes the debt level against a security property. Loan to value Ratio greatly impacts your loan application. Therefore, it is important to know what it is and how it can affect your borrowing power. Read on to learn more about Loan to value Ratio.
The loan-to-value ratio is the proportion of the money you wish to borrow compared with the total value of the property. Lenders define their policy based on maximum loan to value ratios for certain types of loan. For example, a lender may have 95% maximum loan-to-value ratio for an owner-occupied purchase.
A loan-to-value ratio can be calculated by dividing the amount of money you want to borrow with the value of the property. For example, if you wish to purchase a $500,000 house and you possess a $100,000 deposit, then the following calculation will be used to calculate Loan to value Ratio: $500,000-$100,000= $400,000 (Loan amount) Divide $400,000 by $500,000 and multiply by 100, you’ll get the LVR to be 80%.
LVR is calculated differently if you intend to refinance. The reason is that the price you paid for your home may differ from its current value. The current value of your property will be assessed by the bank for calculation of a refinancing Loan to value Ratio.
In calculating Loan to value Ratio, banks will consider several factors to assess the current worth of your property. These may include property size, house size, improvements made to the property, building conditions and any developments that might have occurred recently. Some banks do not require the valuation of a property if it meets the certain criteria as defined by them.
Ideally, low LVR is best. If you have a low LVR, it means there is a lower risk involved for the lender. Low Loan to value Ratio shows that you have a proven list of savings (large deposit), and the lender can, therefore, be confident with lending you the required money. A high LVR means a high risk for the lender. The LVRs above 80% is considered high risk, and for high-risk LVR you are required to pay lenders mortgage insurance (LMI). LMI protects the lender in case of default on home loan payments and minimizes lender’s risk.
Lenders place a major emphasis on the loan-to-value ratio when they assess your loan application as it represents the risk of investing in you. If you have an LVR that is 80% or less, lenders will offer you better interest rates than they would to someone who has Loan to Value Ratio of more than 80%. You will also not be required to pay lenders mortgage insurance (LMI) for an Loan to Value Ratio of 80% or less. Each bank has their own policy for the maximum Loan to Value Ratio they will tolerate and different factors can impact this maximum LVR calculation for your property.
Contact our experts at Josh Financial Services on 1300 537 000 to help you understand what you’re up against.