Firstly, what is the LVR?
The Loan to Value Ratio (LVR) is the amount you are borrowing, represented as a percentage of the property value. For example, if you are considering a loan of $400,000 and the property is worth $500,000 the LVR is 80%.
Why is the LVR important when you are considering the finance of your property?
All Lenders in Australia are currently very keen to lend you money to assist you with the purchase of your home, investment or commercial property. It is a very competitive market. However, the higher the LVR, the greater the risk for the Lender (and you).
Let’s consider three types of property lending:
- Residential Property (owner occupied and investment)Most lenders are comfortable to lend you up to an 80% LVR. Many will also lend above 80%, however, once the LVR increases above 80% the lender must seek further approval from the Mortgage Insurer. If your application is subsequently approved the Mortgage Insurer will charge you a once only (but costly) insurance premium. This insurance protects the Lender (not you) if the Lender needs to sell your property to recover your loan, and your property value has decreased. So, whilst it is possible to borrow up to 95% LVR the exercise can be very expensive. Additionally, most Lenders are happy to discount/decrease their interest rates if the LVR is 75% or below.
- Commercial Property (owner occupied and investment)Most commercial Lenders are usually comfortable to lend up to 65% LVR, with some happy to provide up to 75%. The reason you cannot borrow to 80% on commercial property is that Lenders consider the prospect of selling a commercial property to recover the loan as a greater risk to them (and you), than for residential property.
- Self-Managed Super Fund Lending (SMSF – Residential and Commercial)Buying property in your super fund is more complex, but a growing area of wealth creation. Many SMSF Lenders will lend up to 80% LVR (maximum) for residential property and 65% LVR (maximum) for commercial properties.
In summary, the more contribution you can provide to the purchase of your particular property the easier and cheaper the finance will be – simply as it helps to reduce the overall risk for the Lender and you.