What is an LVR?

The term LVR is used by banks and lenders to evaluate risk, the term LVR is short for 'Loan to Value Ratio'. For example if your property is worth $1,000,000 and you would like a loan of $750,000 your LVR would be 75%.

The LVR is used to determine the risk profile of a loan application, the higher the LVR the greater the level of risk for a bank or lender.

When you apply for a loan with a LVR greater than 80% most banks and lenders will take out an insurance policy called LMI (Lenders Mortgage Insurance). This policy protects the bank against any loss in the event of default by the borrower. Although the insurance policy doesn't protect the borrower, banks will usually pass the cost of the insurance policy on to the borrower to pay.

Additionally banks and lenders are required to hold additional capital for high LVR loans. You will find a lot of banks and lenders will offer rate discounts for customers with low LVR's. Often the lower your LVR the greater the rate discount you can secure.

So what does this all mean for you. Firstly if you are buying your first home the maximum LVR a bank will lender is usually 95%. The greater the deposit you can save, the lower your LVR, which will help reduce your cost of LMI. If you have parents who own their own home you might even be able to apply for a family guarantee loan.

Alternatively if you already have your own home and a mortgage, it might be worth looking to refinance. As property prices continue to increase, the value of your home may have also increased. Even if you have not reduce your own home loan by much, the increased value of your home will help reduce your LVR and in turn may help you secure a lower interest rate with a new bank.

For more information take some time to read some of our other articles:
     - First home buyer tips
     - Family guarantee home loan
     - Offset Home Loan FAQ

If you would like to know more or have some questions please feel free to contact us.

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