Loan To Value Ratio

What is a a loan-to-value ratio (LVR)? 

A loan-to-value ratio (LVR) is a financial term used by lenders to assess the risk of a mortgage loan. It's the ratio of the loan amount to the value of the property being purchased. For example, if you're buying a home worth $200,000 and you're borrowing $150,000, your LVR would be 75%. 

Why is knowing your LVR important? 

Knowing your LVR is important because it has implications on whether you have to pay lender’s mortgage insurance (LMI). LMI is a type of insurance that protects lenders (such as banks) in the case a borrower defaults on their home loan. 

You typically have to pay LMI if your LMI is more than 80% of the property's value. Lenders typically prefer lower LVRs because they indicate that the borrower has more equity in the property, reducing the risk for the lender. 

How much do you pay for LMI? 

The amount of LMI you have to pay depends on several factors, including the size of your deposit, the value of the property, and the lender's LMI premium rates. Typically, the higher the loan-to-value ratio (the loan amount divided by the property value) the higher the LMI premium. 

Let’s say you have a $450,000 loan on a property valued at $500,000 with an LMI premium rate of 2%. In this scenario, you would need to pay an LMI of $9000 ($450,000 x 2%).