Does a Low LVR Mortgage Mandate LMI?

Buying a property and looking to secure a low LVR mortgage? 

Understanding the financial aspects of buying a property can often be overwhelming because there’s all this terminology and specific requirements you might not know off the bat.

What does it mean to have a LVR?

Can I secure a loan with a low LVR?
Will I have to pay lender’s mortgage insurance?

These are all important questions you need to be asking before jumping into the process.

So, we’re here to help you get the answers you need. 

What is Loan-to-Value Ratio (LVR)?

The loan-to-value ratio (LVR) is a percentage that represents the amount of money you are borrowing compared to the value of the property you intend to purchase. It is a key metric that lenders use to assess the risk associated with your loan application. 

The higher your LVR, the riskier the loan is considered, as it indicates a smaller deposit and a higher reliance on borrowed funds.

Calculating the LVR of Your Home Loan

Calculating your LVR is a straightforward process. It involves dividing the loan amount by the purchase price or valuation of the property and expressing it as a percentage. 

For example, if you plan to borrow $450,000 for a property valued at $600,000, your LVR would be calculated as follows:

($450,000 loan ÷ $600,000 property value) x 100 = 75% LVR

Importance of LVR for Lenders

Lenders place significant emphasis on the LVR when assessing loan applications. As mentioned previously, a lower LVR indicates a lower risk for the lender, as it signifies a larger deposit and a smaller loan amount in proportion to the property value. 

Generally, loans with an LVR over 80% are considered higher risk. In other words, the banks want at least a 20% deposit to minimise their risk. 

The maximum LVR that banks will allow you to borrow depends on various factors, including the following: 

• Location of the property: Banks tend to allow higher LVRs in major cities and metropolitan areas with stable local property market trends and good prospects for long-term capital growth, however LVR may be reduced or restricted when Apartment and units are plentiful around the area. More risky or remote locations will have lower maximum LVRs.
• Your credit history: With a strong credit record with no late repayments or defaults, banks will be more comfortable lending at a higher LVR. Any credit issues will lead to a lower maximum LVR.
• Income: Higher incomes give you greater borrowing capacity. So, banks will permit higher LVRs if your income is substantial enough to service the loan. Lower incomes mean lower maximum LVRs.
• Employment history: Secure long-term employment in a stable industry or role, which builds confidence. Self-employment or unsteady work history leads to lower maximum LVRs.
• Type of loan: Owner-occupier home loans allow higher LVRs than investment property loans. And certain loan types, like first-home buyer loans, have LVR caps built into their eligibility criteria.

The combination of these factors determines the maximum LVR the bank is willing to take on. A strong application means you can qualify for a higher LVR. Weaker areas lead to tighter LVR limits.

In most cases, however, if you can’t meet the 20% deposit requirement, the lender will still consider granting you a higher LVR mortgage, provided you pay the lender’s mortgage insurance. 

What is Lenders Mortgage Insurance (LMI)?

Lender’s Mortgage Insurance (LMI) is a type of insurance that protects the lender in case the borrower defaults on their home loan. It is usually required when the borrower has a high loan-to-value ratio (LVR) of over 80%.

How LMI works:

• LMI protects the lender if the borrower fails to repay the loan and the lender has to foreclose and sell the property.
• It covers the gap between the outstanding loan amount and the sale proceeds if these are less than the outstanding loan.
• The insurance premium is payable by the borrower, either as a one-off lump sum or added to the loan amount.
• LMI protects the lender by reducing its risk when lending at higher LVRs. But, the cost is passed on to the borrower.

As previously mentioned, LMI is typically mandatory for LVRs over 80% as the deposit amount is less than 20% of the property value. It provides security to the lender in case the market declines and the sale of the property does not cover the outstanding loan.

Note: Refinancing at higher LVRs may also trigger LMI requirements.

Can I Avoid LMI?

Besides increasing your deposit amount, there are a few other ways you can potentially avoid the LMI fee: 

• Opt for LMI exemptions – Some lenders may exempt LMI for specific borrowers, like doctors, engineers, and teachers. Check if you qualify.
• Add a guarantor – A guarantor may give the lender more security, so they waive the LMI requirement.
• First homebuyer schemes – If this is your first property, you can apply for the various government schemes, such as the First Home Loan Deposit Scheme, that allow you to secure a loan with a 5% deposit and no LMI. 

Key Takeaways

• ​​Calculating your LVR is simple – just divide your loan amount by the property’s value
• Lenders scrutinise LVR closely, as it indicates your equity and risk level
• LVRs above 80% often require lenders to provide mortgage insurance, adding to costs
• Aim for at least a 20% deposit to keep LVR low and avoid LMI
• First-home buyer programmes can assist with low-deposit LVR mortgages

Ready to crunch the numbers on your LVR mortgage in Sydney? 

The expert team at The Mortgage Agency can help navigate LVR requirements and find the most suitable loan for your situation.

Contact us today to discuss your home loan options and get the LVR knowledge you need to buy smart.

FAQs

What is a Good LVR?

A good LVR is usually 80% or lower. This means you have at least a 20% deposit, and the loan amount is no more than 80% of the property’s value. Lenders see LVRs of 80% or under as low-risk.

Does LVR Affect Interest Rates?

Yes, your LVR can impact the interest rate lenders offer you. The higher the LVR, the higher the risk, so lenders often charge a higher interest rate on mortgages with an LVR over 80%. A lower LVR signals less risk so you may be offered a lower rate.

What Happens if My LVR is Too High?

If your LVR is over 80%, most lenders will require you to pay LMI to protect themselves against default. LMI adds thousands to your loan. Some lenders may not approve loans above 90% LVR due to the high risk.

What is an Online Bank Valuation?

An online bank valuation is an estimate of a property’s value conducted remotely by the bank or lender. It involves analysing market data, previous sales, and comparable properties. The valuer does not physically inspect the property. Online valuations are quicker and cheaper but may be less accurate.

Is a Loan-to-Value Ratio Calculator Useful?

Yes, an LVR calculator can be handy when applying for a mortgage. It lets you estimate your LVR by inputting the loan amount, property value, and other details. 

This gives you an indication of the LVR before final approval. LVR calculators help you understand how factors like deposit size can impact your ratio. Being able to estimate your LVR is valuable when assessing affordability.

How Can I Get a Better Bank Valuation on My Property?

Get valuations from multiple sources. Do your own research on sales prices and the current market value of comparable properties. Highlight any renovations or improvements made. Provide evidence to justify a higher price. Negotiate politely with your lender if the valuation seems low.

What Factors Affect Property Valuations?

Location, property size, number of bedrooms or bathrooms, land size, unique features, condition, views, comparable sales, current market conditions, renovation potential, and zoning regulations can all impact a property’s valuation. Supply and demand also play a role.