Do you know what an LVR is? If not, you've come to the right place. Every day, first home buyers across the country come up against various difficulties as they try and find their perfect property. From working out home loan repayments to organising inspections to self-education on settlement periods, it's sometimes enough to make you scream.
Your loan to value ratio (LVR) is just one term you'll uncover on a first home buying journey. But what does it actually mean?
What is an LVR?
Let's start with the definition of LVR given by the Australian Securities and Investments Commission (ASIC) – one of the biggest national authorities on all things money and property.
"The amount of a loan as a percentage of the value of the asset it was used to buy," ASIC states.
For property, this means how much of the real estate's value you are borrowing – and by association, how much you are putting up as a deposit. For example, if a home loan has an LVR of 80 per cent, that means you can borrow this much of the home's value – 20 per cent of it must be put up front. It is essentially a measure of how risky a loan is – the higher the LVR, the more risk the lender is taking on.
This is where it starts to get a bit trickier – what is the right LVR?
Keeping it in line
Generally, banks will require an LVR of at least 80 per cent – no higher, or it becomes too risky for them. This means you have to come up with 20 per cent of the price on your own. Considering CoreLogic RP Data has the median Adelaide value at $467,520 at the moment, that means a deposit of $93,504!
It can be difficult to find a home loan that lets you buy comfortably!
If you do secure a home loan with an LVR of more than 80 per cent, you may have to pay Lenders Mortgage Insurance (LMI). This is a one-off payment that can be in excess of $10,000, to protect the bank against further risk.
Investors seeking finance will often have to contend with lower LVR limits, requiring them to pay more. In fact, it can be difficult to find a home loan that lets you buy comfortably! Fortunately for you, that's where a mortgage broker can be very handy. By providing you with a wide range of potential loans, you can pick one with an LVR that suits you.