Tuesday, June 19, 2012

LVR for Dummies

A lot of people who want to buy a house will find themselves facing a lot of technical terms and may become so confused about the different things they need to know and understand. It is important to know that buying a house entails a process that can be challenging for some but by understanding how everything works and what the different terms mean, many individuals may find the process less stressful.

There are many things an interested homebuyer will need to study. One of them is LVR.


LVR, or the Loan to Value Ratio, is the amount of money homebuyers borrow. This is simply the amount of the loan.

It is calculated by dividing the amount one wishes to borrow to the price of the property and then multiplying it by 100. For instance, if a borrower is borrowing $350,000 to purchase a home worth $400,000, the LVR would be calculated this way: 350,000 / 400,000 = 87.5%

The LVR will not cover the whole amount of the property one is interested in buying. For example, an individual who is going to buy a house that is worth $400,000 will not get $400,000 from lenders.

Why is this important?

Lenders put a heavy consideration on this ratio when processing home loans. This will help them identify which loan applications to approve and whether or not a certain borrower poses a risk of defaulting.

Lenders are always concerned with borrowers not being able to repay the loan. This is why they implement strict guidelines when processing loan applications. They require a borrower to show certain documents to prove his or her ability to afford the loan.

Thiswill determine how much risky a certain loan is.LVRs that are higher than 80% are considered risky. That means the borrower will need to pay for lenders mortgageinsurance. This insurance will protect the lenders from losing money in case the borrower defaults on the loan.

For those who are obtaining unconventional loans like low doc home loans, going beyond 60% will them to pay for the insurance premium.

What is the maximum amount people can borrow?

Naturally, people who want to take out a loan will want to borrow 100% of the property price. But that is not possible except for very specific circumstances. Most of the time, however, interested homebuyers can only borrow less.

The amount people can borrow will depend on different factors: amount of the loan, location of the property, credit history, and the type of loan being applied.

Someone who has a very good credit rating (high credit score) and is in a very good financial standing will be allowed to borrow at least 80%.  Some can even receive 90% to 95% of the loan.

For people who cannot provide supporting documents (employment records) will only be allowed up to 60%LVR. But they can also borrow 80% of the loan if they are in a very good financial position.

The only time when people can borrow 100% of the property amount is when there is a guarantor. It could be a family member or a friend who is willing to guarantee the loan application by putting up a portion of their property to secure part of the loan applied.

Is it possible to predict LVR?

Any borrower who wishes to know how much lenders can loan them can use LVR calculators. These are online tools that will calculate how much a borrower can get. These are very easy to use. All one needs to do is put the loan amount and how much the property is worth. In just a few seconds, the system will display the estimated Loan to Value Ratio.

To better understand the terms and processes that involve buying a house, it is advantageous to work with the best mortgage broker available. That way, not only are you going to have a full understanding of what LVR is, you’ll also know the different steps you need to take to obtain a mortgage loan that’s perfect for you.

1 comment:

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