Thanks to high LVR home loans, many Australians find that they can become homeowners sooner than expected without saving up for the typical 20% deposit.
Lenders compare the value of the property you want to buy with how much money you would like to loan from them, and that will be your loan to value ratio (LVR).
Most lenders position the LVR at 80/20 with a 20% deposit, but a high LVR home loan can award you a larger loan amount requiring a smaller deposit.
The following article dives into the nitty-gritty of high loan to value ratio loans and how it could be the way to reach your property goals sooner.
How Do Lenders Work Out Your Loan To Value Ratio?
When you plan to take out a home loan to buy property, you should have at least some money saved towards a deposit. If you’re lucky, you might be able to take out a home loan for 100% of the property purchase price, but this happens rarely.
How much money you need to borrow from a lender depends on how much deposit you have. To work out your LVR, a lender will divide how much money you want to borrow by the property’s value.
Here’s an example:
Tracy has fallen in love with a property that costs $600,000.
Over a few years, Tracy has saved up $60,000 towards her deposit (10%). So, to buy this property, she needs to apply for a home loan amount of $540,000.
Therefore, her LVR works out to be 90%.
What Is a High LVR Home Loan?
Any LVR above 80% is generally deemed high – it means you’re paying less than 20% deposit.
But, the higher your LVR is, the more risky a lender will consider you to be.
Lenders require a certain amount of insurance in case borrowers default on their monthly mortgage repayments.
They see a 20% deposit as enough security to cover any losses that may occur, but anything less than that means you typically have to pay a once-off additional fee called lenders mortgage insurance (LMI.) There are ways around it, though, and we will discuss ways to waive LMI below.
Some people choose to wait before buying property until they have saved up a 20% deposit. This way they can avoid paying LMI.
How a High LVR Home Loan Can Help You Buy Property Sooner
Applying for a high LVR home loan could get you settled into your new house before your peers have even finished saving that 20%.
Lenders only approve loans of how much they think the client will be able to repay. The LVR is a factor that helps them assess the capacity someone has to pay back the loan that they’re applying for.
This reduces the risk of borrowers getting into financial hardship, which means lenders also have more security. Thus, lenders have a maximum LVR they approve for home loans.
You can calculate your deposit requirement based on the maximum LVR offered on a home loan. For example, if a property is valued at $350,000 with a maximum LVR of 80%, the deposit must be at least $70,000. If the maximum LVR is 60%, the deposit would have to be at least $140,000.
Some lenders offer a 95% LVR home loan. A 95% LVR means you only have to pay a 5% deposit plus mortgage insurance costs.
Remember, the higher LVR you have, the more of a risk you are to the bank, therefore you’ll have stricter guidelines in approving your loan.
How Do I Apply For a High LVR Home Loan?
If you want to buy a home but only have a minimal deposit, applying for a high LVR loan can be an easy solution, provided you meet all the requirements.
Some of the criteria generally state that the borrower should:
- be a minimum of 18 years old,
- have permanent Australian residency or citizenship,
- maintain a good credit history,
- provide proof of employment history,
- have a good serviceability ratio (a high income in comparison to your loan)
- have genuine savings for the deposit, at least 5% of the property’s value,
- have low debts in the form of other loans and credit cards, and
- own some assets.
Is a High LVR Loan the Best Option?
There is no such thing as “the best,” there is only what’s best for you.
If your main goal is buying a home and entering the property market as soon as possible, then applying for a loan amount with a high LVR can reduce how long it takes you to save up for a large deposit.
But, because lenders consider an LVR higher than 80% as high risk, you will have to pay lenders mortgage insurance in addition which makes your monthly repayments higher.
So, you could end up paying more in total over your loan term, especially if you add the LMI cost to your loan amount.
How The Mortgage Agency Can Help
At The Mortgage Agency, our mortgage brokers are trained to assess each client’s personal financial situation and give appropriate guidance and advice.
Each person has their own property goals, but reaching them can be a long and complicated journey.
Our brokers can help you:
- choose which type of home loan will best suit your goals,
- work out whether a high or low LVR would best suit you,
- select a variable interest rate or a fixed rate, or opt for both in split-interest option,
- understand which features are available with which home loan, such as an offset account or redraw facility,
- identify which lenders you should apply with,
- navigate the application process,
- choose the best payment structure to suit you, whether it’s monthly or fortnightly, principal and interest, or interest-only, and if you can make extra repayments,
- negotiate better interest rates.
All the while, they are there to answer your questions, provide insight, and walk you through every step of your home loan journey.
A loan to value ratio of above 80% is considered high by lenders, and these types of home loans require more strict guidelines in some cases.
Therefore, with a deposit of less than 20%, you will be required to pay LMI additional. But, you can achieve an LMI waiver and pay less than a 20% deposit if you meet specific criteria.
A higher LVR loan can allow you to buy a home without waiting until you have saved up a 20% deposit. This means you can enter the property market sooner and be a homeowner sooner.
When it comes to choosing the best home loan to suit your needs, employing the financial advice of a mortgage broker can save you time and money. Contact us today to book your free discovery session.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.