LVR Archives - Defence Finance

How the Loan to Value Ratio can affect your borrowing power?

Simply put, the LVR is how much you can borrow from the bank versus the value of the property you bought. The bank uses this ratio to determine your risk factor, as the more, you borrow the higher the risk you pose to your lender.

LVR is easy to calculate, it’s just the amount you’ll borrow over the total value of the property.

As an example:

You have $80,000 saved as a deposit, the property you want is $600,000, so you wish to borrow $520,000. 520,000/600,000 = 86.7% LVR.

However, it is important to keep in mind that there will be some additional costs associated with securing a mortgage, which will reduce the amount you have available as your deposit. If the LVR exceeds 80% a lender will typically require Lender’s Mortgage Insurance (LMI). There are methods to reduce the LMI with some lenders providing products with no LMI up to 85% LVR or using a family guarantee. 

Valuation or Purchase Price?

When the valuation price of a property is different from the purchase price, the lender, as well as their insurer will use the lower price to calculate the LVR.

This is common in two scenarios;

1. When purchasing a property “off the plan” and the value of the property has changed since the contract was signed
2. When buying property from a family member or friend at a discounted price (sometimes known as a ‘favourable purchase’)

Some lenders can choose to use the valuation price in certain circumstances where the contract of sale was signed more than three months before the date that you apply for the loan and the contract is more than twelve months old. In these cases, most lenders would calculate the LVR using the bank valuation.

LVR when Refinancing

As the value of property changes due to a number of factors, the lender will use their own valuation of the property to determine the LVR for refinancing.

Does my property need a valuation?

More often than not banks will not value your property and will simply use the price on the contract to calculate your LVR, provided you meet the following criteria:

1. Your loan is at or below 80% LVR and your loan is under $800,000.
2. You are not related to the vendor.
3. You have provided full evidence of your income.
4. Your property is in a capital city or major regional centre.
5. The purchase is through a licensed real estate agent.
6. The property is not off the plan or a new building.

Each lender has its own policy regarding valuations and this may dedicate the lender your broker chooses if you’d like to know more, get in touch with us.

Disclaimer: The information contained on this web site is general in nature and does not take into account your personal financial situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.