One of the trickiest parts of home buying and financing is Loan to Value Ratio (LVR). LVR has a direct impact on interest rates, and chances of loan approval. With LVR you also know whether you need to pay extra costs like Lender’s Mortgage Insurance (LMI).
You can lose your dream home and money from your pocket when you fail to calculate LVR properly. It’s a critical step that makes or breaks your property investment journey.
However, the good news is that you can LVR smoothly by following the step-by-step approach in our guide. Also, you will learn how to effectively use Citadel LVR calculators to make the process even simpler.
Why Is LVR Important?
LVR reveals the percentage of how much you borrow compared to your property’s value.
For instance:
- 80% LVR: That is when you borrow 80% of your property’s value, and the other 20% is covered with a deposit.
- Lower LVRs usually mean you are eligible for better interest rates and no LMI at all.
- Higher LVRs might attract additional costs and tighter loan terms.
Knowing your LVR can help you get a picture of your financial position and even negotiate with lenders.
How to Calculate Your LVR?
Calculating your LVR is straightforward. Follow these steps:
1. Determine Your Loan Amount
- For home purchases, use the amount you plan to borrow.
- For refinancing, use your remaining loan balance.
- Find Your Property’s Value
- Use the current market value of your property. A professional valuation might be necessary if unsure.
2. Do the Math
- Divide your loan amount by your property value.
- Multiply the result by 100 to get the percentage.
Example:
Loan Amount: $480,000
Property Value: $600,000
LVR = ($480,000 ÷ $600,000) × 100 = 80%
That’s your LVR!
Use LVR Calculator for Convenience
If manual calculations aren’t your thing, an LVR calculator can simplify the process. Here’s how:
- Enter your loan amount.
- Input your property’s value.
- Hit “Calculate.”
The LVR calculator will instantly indicate your LVR as a percentage. It saves time, while the accuracy is automatically given especially when managing lots of numbers.
Also read: How to Calculate Property Value: A Guide for Investors
LVR for Special Cases
1. Calculating LVR for Refinancing
When refinancing, your LVR helps determine your eligibility and loan options. Use the same formula: loan amount divided by property value.
The LVR, for example, would be 70% ($350,000 ÷ $500,000 × 100) if your loan was $350,000 and your house is now worth $500,000.
When your LVR is at its lowest, you benefit through accessing excellent interest rates and LMI not being applicable.
2. Guarantor Loans
The lending considers two properties. For example
- You have a Loan of 480,000 dollars and your property value is 600,000 dollars.
- Then LVR would be: 80%($480,000 ÷$600,000 × 100).
The guarantor enables you to borrow up to 100% of the property’s worth giving an extra security. And you don’t have to pay LMI at all.
3. Bought Off-The-Plan Property
If your LVR changes during this period, from when you first bought the off-the-plan property up until settlement, your property may gain value and your LVR decrease below 80%, therefore no LMI would be applicable.
Tips to Improve Your LVR
A high LVR isn’t always ideal, but here are ways to reduce it:
- Increase Your Deposit: Save more to lower your borrowing amount.
- Choose a Less Expensive Property: Reducing the purchase price decreases the LVR.
- Pay Down Your Loan: If refinancing, reduce your loan balance to improve your LVR.
Why LVR Matters for Buyers?
Your LVR affects your mortgage in several ways:
- Interest Rates: Lower LVRs often lead to better rates.
- LMI Costs: Avoid extra insurance fees by keeping your LVR below 80%.
- Loan Approval: Lenders see lower LVRs as less risky, increasing your chances of approval.
Maximize Your Savings with Citadel Opportunity Cost Calculator
Before finalizing any decisions, it’s wise to calculate the opportunity cost of your loan options. The Citadel Opportunity Cost Calculator helps you compare scenarios, showing potential savings over time. This tool ensures you make the best financial decision by understanding the hidden costs of various options.
Final words
Calculating your LVR is an easy, important step in your finances. Use the formula above or an LVR home loan calculator to get moving. LVR makes your decision even more precise, thus improving your negotiating position in business. Don’t let uncertainty hold you back. Take charge, calculate your LVR, and unlock smarter financial choices!