LVR Calculator
An LVR calc, or Loan-to-Value Ratio calculator, is a tool that helps you determine the percentage of a property’s value that you’ll be financing through a loan. It’s a simple but important calculation used in real estate, especially when applying for mortgages.
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Loan-to-value ratio
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How is LVR calculated?
Calculating your Loan-to-Value Ratio (LVR) is a crucial step when applying for a mortgage. Your lender will determine your LVR by dividing the amount of money you want to borrow by the value of your property. This value can either be the purchase price or a price determined by their assessors.
For instance, if you’re buying a house worth $400,000 and have a deposit of $40,000, your bank would use the following formula to calculate your LVR:
$400,000 – $40,000 = $360,000 (your loan amount)
Then, they would divide $360,000 by $400,000 to get an LVR of 90%.
It’s important to note that if your LVR is over 80%, you’ll be required to pay LMI.
Is LVR calculated differently if I'm refinancing?
When you are looking to refinance, the Loan-to-Value Ratio (LVR) is calculated differently compared to when you first purchased your house. This is because the value of your house may have changed since you bought it. Your bank will assess the current market value of your home to determine the refinancing LVR.
Whats the difference between a high LVR or low LVR?
In order to minimize the risk involved in lending, it is recommended to maintain a low Loan-to-Value Ratio (LVR). A low LVR signifies a borrower’s financial stability, as evidenced by a substantial deposit and savings history, which in turn increases a lender’s confidence in the borrower’s ability to repay the loan. Furthermore, a low LVR (below 80%) may exempt the borrower from paying Lenders Mortgage Insurance (LMI), which otherwise adds to the cost of acquiring a property and serves to protect the lender rather than the borrower. In contrast, a high LVR may lead to the borrower being classified as a high-risk borrower, necessitating the acquisition of LMI or a guarantor.
Why is LVR important?
LVR is a key factor lenders consider when assessing your mortgage application. Higher LVRs can mean higher interest rates and potential fees, while lower LVRs are generally seen as less risky and may qualify you for better loan terms.
What does a "high risk" LVR mean?
A high loan-to-value ratio (LVR) is typically defined as exceeding 80% of the property’s value. In the absence of a minimum 20% deposit, lenders are inclined to perceive a high degree of risk in extending credit, thus necessitating the acquisition of Lenders Mortgage Insurance (LMI) or the enlistment of a guarantor for the loan.
LMI coverage is designed to protect the lender, not the borrower, and to mitigate the lender’s risk when investing in the borrower. Additionally, when dealing with a high LVR, a lender may agree to accept a guarantor, such as a parent or relative, as collateral, which could help the borrower avoid LMI. In the event that the borrower faces any difficulties in making the repayments, the guarantor is accountable for covering the loan payments.
Is an LVR Calculator accurate?
While the calculator provides a helpful estimate, it’s important to remember that the actual LVR may differ based on the lender’s valuation of the property.
