Sunshine Coast resident, Danielle asks
“I’m interested in applying for a home loan, and am somewhat confused by what LVR means? What does it mean, and how is it calculated?“
LVR essentially means loan to valuation ratio.
Basically, it’s the loan amount divided by the value of the property. So, as an example, if you’ve got a loan amount of $400,000 and the value of the property is $500,000, then it’s $400,000 divided by $500,000 which equals 80%.
In other words, it’s the actual percentage that you’re borrowing in total.
For those with two loans – you may have one loan split fixed and another variable – you’d have to add those two loans together, then divide that total by the valuation of the property.
So in layman’s terms, if you borrowed $100,000 for a $200,000 dollar property, it would be 50% LVR.
Is LVR calculated via the valuation or the purchase price?
Typically, most of the time when you buy an established property, the valuation would come back the same as the purchase price. This is the figure that lenders go by when providing finance. So basically, it doesn’t make any difference. However, on the odd occasion, sometimes the valuation comes in lower than the actual purchase price. This generally only happens on brand new properties, and that’s because when buying new you often pay a premium.
And in that instance, if the valuation does come in lower than the purchase price, then the lender will calculate the LVR using the valuation amount. Which generally means you may have to put more money into the purchase, to make up the difference.
This can often be the case in a downward market, or in a market where there’s an over-supply of units for example. It’s not uncommon for someone to buy an off the plan unit which isn’t scheduled for completion for say, 2 to 3 years.
In that case, you might buy the unit for $500,000 and in 2 years time when it’s due to settle, the bank sends a valuer out to the property, and instead of the unit being valued at $500,000, it may have dropped to $450,000. This can present some unexpected problems.
If that were the case, the bank would work with the lesser amount.
What we tend to see are people putting down a 20% deposit in order to avoid having to pay mortgage insurance. So, if you were planning on borrowing $400,000 against a $500,000 dollar property, and that valuation came in at $450,000 (and you still wanted to borrow $400,000), then instead of borrowing 80%, you’d actually be borrowing almost 89%.
This is because the bank will then divide the loan amount of $400,000 by the valuation amount of $450,000 instead of dividing it by the intended purchase price of $500,000. As a result, using this as an example, you’d incur a lenders mortgage insurance premium.
If you wanted to avoid lender’s mortgage insurance, you’d have to put in another $40,000 dollars to reduce the loan amount back down to 80% of the valuation. So $360,000.
On the other hand, it can also work the other way.
In a good market, it may be the case that you purchase a property for $500,000 but 2 years later when it settles, the property might be worth $600,000. In those instances, it can work in your favour.
This was the case in the Sydney market up until 12-18 months ago.
A lot of people purchased off the plan 3 or 4 years ago at a certain price, and during that time property prices went up considerably. Buyers then found that when they settled on the property, it had increased in value.
Some banks will lend against the higher value as opposed to the purchase price. For property purchases, normally banks will lend against the lower of the valuation or contract price, but for an off the plan property where the contract was signed more than 12 months prior, there are some lenders that will lend against the valuation, even if it’s higher than the purchase price.
To demonstrate further, let’s say you purchased a property valued at $500,000 and paid the 10% deposit ($50,000) upon signing the contracts. If you wanted to avoid mortgage insurance, you’d have to put in another $50,000 to bring the total loan amount down to $400,000.
But, if the value of the property had gone up to $600,000 at the time of settlement, then it’s quite possible that you wouldn’t have to put any more money into the purchase because you could potentially then just borrow $450,000 because $450,000 divided by $600,000, is 75%.
In those situations you could potentially avoid mortgage insurance, only putting down a 10% deposit, which is highly beneficial.
How the GFC affected lending
Prior to the global financial crisis many lenders were lending 100%, even up to 106% of the purchase price without any additional security. In other words, you could get 106% LVR but since the GFC, typically the highest LVR you can borrow is 95% of the purchase price plus the mortgage insurance premium for an owner-occupied purchase.
Calculating the value of a property
Valuers are independent companies that are appointed by the lenders.
Values for residential properties for example, are usually determined by looking at comparable sales. Put simply, they look at what other similar dwellings within a fairly tight radius of the security property have sold for in the past six months.
The other thing to take into consideration is LVR and refinancing.
When you’re refinancing, valuers will generally assess your property value again using comparable sales within a tight radius, and apply the same methodology to calculate its value.
If you have a loan of $400,000, and you’re wanting to move to a cheaper loan for example, ideally you’d want the property to be valued at $500,000 to ensure your LVR is 80% or less. This is simply because you’ll want to try and avoid having to pay mortgage insurance.