Buying your first home can be a thrilling prospect, but it can also be overwhelming with all the financial terms and administrative obligations surrounding it.
Regardless of the inherent difficulty, it’s essential to develop an understanding of these matters before you settle into the thought of purchasing your first property.
For most people, buying a new property means making an initial down payment and paying the rest of the purchase price through monthly repayments.
The average homeowner won’t always have enough funds to cover the total listing price of a standard piece of property, which can reach upwards of $1,000,000 in highly urbanised areas like New South Wales and central Victoria.
As such, it’s not uncommon for them to take out a loan to cover the cost of these mortgage repayments. But this begs the question: how much can borrowers take from credible financial institutions like lending companies and banks?
If you’re wondering the same question, then you’re in the right place.
Buying a property is often done with the help of an active loan arrangement, and an LVR—or loan-to-value ratio—can show a figure that helps lenders assess the credibility of your home loan application, thus enabling them to provide a lump sum arrangement relative to your profile.
For first-time homebuyers, this article will help deepen your understanding of LVR and how you can utilise it to navigate homeownership more confidently. Let’s get started.
What is LVR?
Before anything else, let’s wrap our heads around what LVR means so that we’re on the same page.
A loan-to-value ratio is essentially a figure that compares the amount you want to borrow (your desired loan amount) against the value of the property you want to buy (the property listing price). You can learn more about it in Westpac’s guide to understand loan-to-value ratios more precisely.
The LVR is usually depicted as a percentage, and the lower it is, the higher your risk profile may appear in the eyes of lenders. This can make you subject to stricter lending conditions or higher costs to pay things such as the lender’s mortgage insurance.
On the contrary, the higher it is, the more favourable-looking your risk profile will appear to be, which can help grant you better lending conditions, like a lower interest rate.
In any case, lenders typically use LVR to assess how much of the property’s value is being covered by the loan. This helps them determine the level of risk involved in approving your application.
How to Calculate Your LVR
Calculating your LVR is a fairly straightforward process, and it’s a good metric to calculate to know the likelihood of success when applying for a loan from various lending companies.
In a nutshell, calculating your LVR entails the following formula:
Loan amount ÷ Property value × 100 = LVR
For instance, if the property you’re looking to purchase is worth $1,000,000, and you plan to borrow a loan amounting to $600,000, then your LVR would be 60%. This means the lender is funding 60% of the property’s value, while the remaining percentage of 40% would come from your own deposit.
In essence, a higher LVR would mean you’re borrowing a larger share of the property’s value. A lower LVR, on the other hand, would mean you’re contributing more of your own funds upfront.
Knowing this before taking out a loan will help you understand how much the breakdown is for your property loan, granting you a deeper understanding of your mortgage repayment obligations.
What First-Time Home Owners Should Know About LVR
For first-time homebuyers, LVR is an essential metric to help you fine-tune how much you’re depositing and how much you’re taking out for a property loan.
That said, there are specific ways you can leverage LVR to strategically prepare yourself for home ownership.
Here are things first-time homeowners should know about LVR to maximise their loan application.
1. LVR Can Affect Whether You Pay LMI
First-time home buyers should be aware of is the fact that the lender’s mortgage insurance may change depending on the LVR.
This type of home insurance is an insurance policy that covers the lender, and the cost of this is often passed down to the borrower when they apply for a loan. This is usually the case if you don’t have a substantial deposit to put down for the initial deposit.
The higher the loan percentage is over your property value, the higher the LMI will be, meaning the more expensive the loan application will also be on your end. The purpose of this insurance is to protect the lender in case you’re unable to pay your obligations.
Lenders generally consider loans over 80% LVR high-risk. If your LVR exceeds that amount, you’ll have to pay an LMI. This is separate from the loan. On the other hand, percentages that fall below this LVR are typically safe from high LMI fees, or any LMI fees at all.
Knowing about your LMI helps you know the full breadth of your financial obligations towards the lender. But the main thing to take away here is that the higher your initial deposit is, LMI subsequently decreases, and vice versa.
2. The Lender Appraises The Property Themselves
Another important thing first-time buyers should know is that the lending company or bank will usually appraise or value the property separately from the way you do.
This means that the lender could have a different assessment of the property’s inherent worth, not immediately agreeing to the property’s true value.
For instance, you may agree to buy a property for $800,000, but the lender may value it at $750,000.
If that happens, your LVR will be calculated using the lender’s lower valuation, not the agreed-upon price you have made with the property seller. This could cause your LVR to be higher than expected, requiring you to put in a larger deposit in the process.
A bank valuation can affect your borrowing power; as such, it’s important to be prepared for that to ensure you have enough of a financial buffer in case you need to put in a higher amount of money in your deposit to be eligible for a loan agreement.
3. There are Other Upfront Charges to Know About
It’s important to note that LVR only focuses on the relationship between your loan amount and the property’s value. It does not automatically account for the other upfront costs that come with buying a home.
Besides the loan fee you’re expected to pay, you’ll also be subjected to various fees that can influence the property’s final price. This should be factored into your budget, as you’re traditionally expected to pay about 8-10% more on miscellaneous fees on top of the property’s purchase price.
Here are some of these upfront charges to know about:
- Stamp duty
- Conveyancing or solicitor fees
- Building and pest inspection fees
- Loan application fees
- Government registration fees
- Home and contents insurance
- Moving costs
You’re expected to handle these payments by setting aside funds separate from your home loan and deposit. Some costs, like building and pest inspections or conveyancing fees, may need to be paid before settlement. Others are usually handled during the settlement process through your solicitor.
Because these charges can add up quickly, it’s important to calculate them early instead of treating them as last-minute extras. This gives you a clearer picture of the actual amount you need to complete the purchase and helps prevent cash flow issues before you officially take ownership of the property.
We hope that this article has helped you understand LVR and property ownership in a deeper light. All the best in thriving in your own journey towards better financing and property ownership!
Disclaimer: The information in this article is general in nature and is not intended to be financial advice. It does not take into account your personal objectives, financial situation or needs. You should consider seeking independent advice before making any financial decisions. Any links to third‑party products or external websites are provided for information purposes only.
