When discussing home loans and property purchasing, the term Loan to Valuation Ratio (LVR) is commonly mentioned. Your LVR expresses the amount you owe on your home loan as a proportion of the value of your home. Understanding your LVR is crucial because it indicates how much of your property you truly own. The lower your LVR, the more of your property you actually own.

During your home-buying journey, your LVR affects how much confidence a bank or lender has in lending to you. A lender will value a property and decide how much it is prepared to loan you based on its own valuation.

For example, if you have $60,000 saved up for a home loan deposit, and you are interested in a home advertised for $500,000, you will need to take out a mortgage of $440,000 (excluding all other costs).

In this case, if the lender also values the property at $500,000, the LVR would be calculated as:

($440,000 ÷ $500,000) x 100 = 88%

The lower your LVR, the more of your home you own and the lower the risk in lending to you. An LVR of 80% or below is considered lower risk compared to those above 80%. Individuals with low LVRs typically have larger deposits, which reduces the risk for lenders and often results in lower interest rates on the mortgage.

It’s important to understand that while your LVR is initially based on your property price and the amount you borrow to purchase it, your LVR is not static and can change regularly. As you make payments on your loan balance or if your property increases in value, your LVR can decrease. Conversely, if your property value falls or you decide to borrow more on your existing mortgage, your LVR will increase.

If you’re planning on making changes to your home loan in the future, reach out to your local bank or broker to determine the best course of action. Make sure you know exactly how much you need to save before proceeding with your application. Bendigo Bank offers free home loan health checks. Click here for more information.

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