The Loan-to-Value ratio (LVR) is the amount of your loan compared to the value of your property. The lower your LVR, the lower the risk you are to your lender and as a result you may qualify for cheaper interest rates.
How is it calculated?
Whether you are purchasing a new home or refinancing, a lender will order an independent property valuation to determine the property value and assess your application. This will then be calculated against how much you need to borrow to determine the loan to value percentage. When determining how much you will need for your dream property remember to factor in additional expenses such as stamp duty and legal costs, as well as any savings you are putting towards the purchase.
What is it used for?
Your LVR determines how much you own of the property (in other words, your equity). This helps the lender determine how much of a risk you are and, as a result, whether you will need to pay Lenders Mortgage Insurance (LMI). Generally, loans with an LVR greater than 80% will need to pay LMI. This rule also applies to refinanced loans if you have not paid your LVR down to less than 80%, in which case you may have to pay LMI again, even if you’ve already paid the insurance on your first loan.
So how can I lower my LVR?
There are a few strategies you can take to keep your LVR on a downward trajectory.
Pay down the loan/s: the most straightforward strategy is to pay down the loan. Make sure you are making your minimum repayments and consider making extra repayments or changing your payment cycle in order to pay it down more quickly.
Wait for your property to appreciate in value: As a general rule, this tends to happen gradually and over an extended time frame. However, with the right timing in a rising market, you could find your property appreciating much faster. Keep an eye on what similar properties in your area are selling for and consider a professional appraisal if you’d like to put a more definite figure on where your property sits in the market.
Work smarter, not harder, with your property improvements: make sure your efforts and cash will have a good return on investment. What improvements are going to add to the value of your property? Consider features that may be desirable to potential buyers and what sort of lifestyle they are looking for when it comes to buying a home. Investing in creating a practical and usable outdoor entertainment area may have a greater return than smaller fixtures that are to your taste.
Understanding your LVR is empowering, enabling you to better understand your financial position and make decisions accordingly. When it comes to home loans more often than not borrowers are in it for the long-game. By incorporating a few strategies to pay down your property faster, checking your LVR at regular intervals allows you to feel the not-so-small wins on the way to owning your home outright.