HOME LOANS
Can you get a low deposit home loan?
By Megan Birot
What does LVR mean in home loans?
LVR or loan-to-value ratio is your loan amount represented as a percentage of your property's value. LVR is calculated by dividing the loan amount by the property value, then multiplying that by 100.
Here's a simple LVR calculation for a property valued at $600,000 and a buyer with a $150,000 deposit, resulting in a $450,000 home loan amount.
$450,000 (loan amount) ÷ $600,000 (property value) = 0.75 x 100 = 75% LVR
The larger your deposit when applying for a home loan, the lower the LVR will be as a result.
How does LVR impact your home loan?
LVR is lenders' most important metric when assessing your home loan application and home loan interest rate, according to Mansour Soltani, Money.com.au's home loan expert. It’s one of the big indicators of your risk as a borrower.
Generally, lenders consider loans with a loan-to-value ratio over 80% of the property value to be a particularly high risk. That's why if your LVR exceeds 80%, you generally have to pay lender's mortgage insurance (LMI) – a one-off insurance premium that covers the lender against the risk of default.
There are several government schemes that help eligible first home buyers with low deposits avoid the need to pay for LMI.
LVR affects your borrowing power and interest rate. That's why when you see a rate advertised, you'll often see 'based on an LVR of X' in the fine print. The lower your LVR, the lower the risk to the lender and the lower your rate may be. See this example from ING.
Keep in mind each lender has its own method of determining a property’s value, and sometimes one bank's valuation will be higher (or lower) than the next.
Why property valuations matter
Mansour Soltani, Money.com.au’s Home Loans Expert
“This could be the difference between getting a good rate and a great rate. Get your mortgage broker to ‘shop the valuation’ across 3 to 5 lenders to see who gives you the best valuation; this will get you the best LVR and the best deal on your home loan.”
Mansour Soltani, Money.com.au’s Home Loans Expert
What is a good LVR?
A loan-to-value ratio (LVR) of 80% or less is generally seen as ‘good’, but the most competitive rates are often reserved for borrowers with an LVR of 60% or less. For lenders, a lower LVR means reduced risk; for borrowers, it usually means better interest rates, lower home loan fees and more favourable loan terms.
Homeowners refinancing an existing loan typically have lower LVRs and are more likely to qualify for the best rates. However, first home buyers with a large deposit relative to their loan amount may also be able to access competitive deals.
If you’re purchasing a property, upfront costs such as conveyancing and stamp duty are not included in the loan amount for LVR calculations. These are out-of-pocket expenses that will need to be budgeted for leading up to settlement.
Is LVR based on the property’s valuation or purchase price?
Your LVR is based on the lender’s valuation of your property – whether you’re buying or looking to refinance the loan on your current home.
If the property's purchase price differs from the bank's valuation, the lender and its mortgage insurer will often use the lower of the two when determining the LVR.
One typical example is off-the-plan purchases, where the property's value may have either increased or decreased between when the contract of sale was signed and settlement day (when ownership is officially transferred). If the property’s value increases, this works in your favour, resulting in a better LMI assessment (and a lower rate). But the opposite could be true.
Another equally common situation that can create variations in the purchase price and bank valuation is when a borrower is looking at buying a property from a family member at a discounted price. This scenario is commonly referred to as a ‘favourable purchase’. In this case, lenders often calculate the LVR based on their own valuation instead of the purchase price.
Why do lenders have maximum LVR limits?
Banks and other major lenders cap the LVR on home loans to mitigate their risk. The maximum LVR most lenders will accept is 90-95% of the property’s value, while some may not accept a loan-to-value ratio over 80%.
If your lender determines you’re a high-risk borrower (e.g. you are applying for a low doc home loan), it may limit your maximum LVR to reduce the risk of you defaulting on your home loan repayments.
Here’s a common example of when a lender may impose an LVR limit:
- Let’s say you apply for pre-approval to buy a home for $500,000.
- You have a $25,000 deposit to contribute towards the purchase.
- The home loan amount you apply for is $475,000.
- This results in a 95% LVR, which is very high but still within the lender’s maximum.
- However, you have a default on your credit file, so you may only be eligible for a bad credit home loan with a maximum of a 90% or 80% LVR.
Other reasons lenders may reduce LVR limits
This revolves mostly around the difficulty to re-sell or evaluate the property’s long-term value. This may include:
The property is unusual
The property you’re buying has an unconventional design, layout or size. For example, it might have characteristics that most buyers aren’t in the market for, such as an outhouse toilet or a questionable feature wall.
It comes with restrictions
Restrictions are imposed on the property that prevent it from being sold in a standard manner. This can include heritage-listed properties, serviced apartments and display homes.
You’re buying before selling your existing property
This is usually done through a bridging loan, which allows you to buy a new home before selling your current one. Because you’re temporarily carrying more debt, lenders may impose stricter lending criteria, including tighter LVR limits.
It’s in a remote location
You’ve heard the old saying, “location, location, location” – and it definitely applies here. Properties in remote or less accessible areas can be harder to sell, which may impact their marketability and appeal to lenders.
Similar properties have had difficulty selling
The property and similar properties in the area have significant difficulty selling or have not been shown to have sold easily in the previous 6-12 months.
The easier it is to assess the current and future value of a property, and its eligibility to be sold, the less likely a lender is to impose LVR restrictions.
