What is L.V.R and Why is it Important?
Understanding L.V.R. and Its Importance
Hey there! At JKL Real Estate, we believe in making complicated financial terms simple and friendly for our extended family. So, let's chat about L.V.R. – Loan-to-Value Ratio – and why it’s a big deal when you're looking to buy a home.
What is L.V.R.?
L.V.R. stands for Loan-to-Value Ratio. It’s one of the key factors lenders consider when assessing your home loan application. Essentially, it’s the percentage of your loan compared to the value of the property you want to buy.
Why Does L.V.R. Matter?
Think of L.V.R. as a security blanket for your lender. The higher your deposit, the lower the L.V.R., and the safer it feels for the lender. A lower L.V.R. can improve your chances of loan approval because it shows that you’re a lower risk. On the flip side, a high L.V.R. might mean you need to pay for Lender’s Mortgage Insurance (L.M.I.), especially if your L.V.R. is above 80% (which means your deposit is less than 20%).
The Cost of L.M.I.
Lender’s Mortgage Insurance can be a significant expense, and it’s one that many home buyers try to avoid. It’s like paying for peace of mind for the lender. If your L.V.R. is over 80%, be prepared for this additional cost.
Different L.V.R. Caps
Not all suburbs are created equal in the eyes of lenders. Some areas may have different L.V.R. caps due to their unique risk profiles. It’s always a good idea to check with your lender to know exactly what deposit is required for your desired location.
Factors Influencing L.V.R.
Lenders might adjust your required L.V.R. based on several factors:
- Your financial position
- Your credit history
- The amount you’re borrowing
- The location of the property
- The type of loan
And remember, the lender will base their loan amount on their valuation of the property, which might be different from the market value.
Market Value vs. Bank Valuation
Market value is what your property might sell for, but a bank valuation is usually more conservative. This valuation is what the lender expects to recover if they need to sell the property. If the bank’s valuation is lower than what you paid, you might need to make up the difference to satisfy the lender.
Calculating Your L.V.R.
Want to calculate your L.V.R.? It’s easy! Divide your mortgage amount by the property’s purchase price. For example, if you’re buying a home for $500,000, with a $100,000 deposit, your loan amount is $400,000. So, your L.V.R. is 80% ($400,000 / $500,000).
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