What is LVR, exactly?
Wednesday, June 11, 2014
‘Home Owner’. Sounds so grown up. And it is. But it's also something we can take as a bit of a birthright in Australia, where home ownership rates have been traditionally high. But not many of us will have a house simply presented to us, fully paid and ready to move into, so we need a bit of savvy and a bit of smarts. We need to do some thinking, run up the numbers and make sure we know things like what the bank manager is talking about when we sit down for that big mortgage meeting. What do you do, if, say, during your loan meeting, your lender drops the letters ‘LVR’ into the conversation? What does LVR mean? Read on.
First, the basics. LVR stands for Loan to Value Ratio. And you do really need to know what it means and understand its finer points.
Basically, the LVR on any loan is the proportion of the money needed from a lender,relative to the purchase value of, in this case, the house. So, you have a house valued at $450,000 and you have $90,000 in cash to act as a house deposit, then the mortgage loan you are looking for is $360,000. Your LVR is therefore 80%, or the relationship of $360,000 to $450,000. This is calculated as follows:
$360,000 (loan amount required) / $450,000 (full purchase price) = 0.8
0.8 x 100 = 80 (your LVR expressed as a percentage, i.e. 80%)
That 80% figure is generally the minimum most loan providers will be asking for without requiring you to take out a Lenders Mortgage Insurance policy, to protect them from default. Loans above an LVR of 90% are considered risky and will be considered accordingly.
So, you would be wise to aim for an LVR of 80% to ensure you have the best chance of getting your loan and so you won’t have the added impost of insurance on top of your mortgage.
This up-front or deposit figure can be savings, money from family or a government home owners grant figure. It can be used in the purchase, it can be included in your credit in an LVR rating.
Your LVR is important because it will likely determine your home ownership costs and the time it takes you to pay out your mortgage. The higher the LVR, the more difficult your loan search could be and the more expensive, and probably longer, your eventual home loan will turn out.
Low LVRs, representing a decreased risk for the lender, may help borrowers surmount a poor credit history, income difficulties or high personal debt levels and may decrease the overall loan load.
LVRs of 100% are not even out of the realms of possibility but will attract killer conditionality and added costs to mitigate the very high risk. It was this type of loan that became common during the mortgage crisis in 2007 and beyond, particularly in the US, and so for this and other reasons these are less common these days.
It's clear in the loan to value ratio that also the valuation figure is important, and as anyone who has ventured anywhere near the property market will know, valuations can be inconsistent. Valuations can be done by professional valuers, which you can usually find via your local real estate agent, or simply by an agreement between the vendor and the buyer, a so-called “arm's length” evaluation.
The latter is often preferred by lenders as it more or less represents a static price and doesn't, on the surface, require the purchase to be hurled into the market to be pushed and pulled about by prevailing conditions.
In either case, the lender will use the lowest figure to calculate your LVR and to assess your loan application accordingly.
Having a less-than the standard LVR (say, higher than 80%) makes things more challenging, but it's no dream killer. As noted, the option of lender's mortgage insurance is relatively common. Also, lenders may enter into a no-doc loan arrangement which is generally an option for those who don't have a regular income or asset base (contractors or self-employed workers for instance). As with insurance this will cost the borrower more of course, as it is a riskier deal for the lender. And, again, since the global financial crisis and the association of derivative forms of these loans to the debt crisis, these are less common than they were.
For those considering multiple mortgages, a combined LVR - or CLVR - can be worked out. This simply adds together the initial loan principal balance to the second loan or mortgage to give a single figure. For instance, let's say we're further down the track on that $360,000 loan above, and let's assume that home is now valued at $500,000. The remaining balance on the initial mortgage is $250,000 and the second mortgage being sought is for $50,000. In this case then, the CLVR is $300,000 or 60%.
Pitching for a home loan is highly competitive. They want your signature. So, borrowers shouldn't feel they need to go with the first lending institution that says yes. That goes especially for those with high LVRs as the market here is particularly competitive and offers the borrower some discretion and some power. A range of high LVR deals are constantly being thrown into the market, so keep an eye on developments and don't ever commit until you feel you can cover the loan.
Finally, it's important to understand that your LVR is not the only means of calculating your potential risk profile as a borrower. Bankers love their numbers and it is simply a device that becomes part of the mix of data that will be thrown into a spreadsheet to assess your credit-worthiness. It's not the be-all-and-end-all, but you need to know the landscape.