Understanding Loan-To-Value Ratios (LVR)
Buying your first home is an exciting journey, but it can also be a bit overwhelming with all of the jargon that’s thrown around. One term you might have come across is "Loan to Value Ratio" or LVR. But what exactly is LVR, why is it important, and how can you calculate it for the home you're interested in buying? Let's break it down in simple terms.
What is a Loan-to-Value Ratio (LVR)?
The Loan to Value Ratio, or LVR, is a financial term used by lenders to assess the risk of lending you money for your home purchase. It’s essentially the percentage of the property's value that you need to borrow to buy it. The higher your LVR, the more you’re borrowing in relation to the property’s value, which can increase the lender’s risk.
For example, if you have a 20% deposit saved up for a home, your LVR would be 80%, meaning you're borrowing 80% of the home's value. Lenders in New Zealand often prefer an LVR of 80% or lower. This means you’ll need at least a 20% deposit to be in a stronger position when applying for a mortgage.
Why is LVR Important?
LVR is important because it directly impacts your ability to get a mortgage, the terms of that mortgage, and sometimes even the interest rate you'll be offered. Here’s why it matters:
Risk Assessment: Banks and lenders use LVR to evaluate the risk of lending you money. A lower LVR means you're borrowing less compared to the value of the home, which is considered less risky.
Mortgage Approval: In New Zealand, if your LVR is higher than 80%, you may face more strict lending criteria or may need to look for a specialised lender who deals with low deposit loans.
Interest Rates and Fees: A higher LVR may mean higher interest rates or additional fees. Lenders tend to reward lower-risk borrowers with more favourable terms.
How to Calculate the LVR of a Home You’re Interested In Buying
Calculating the LVR is quite straightforward. Here’s a simple formula:
LVR (%) = (Loan Amount / Property Value) x 100
Let's say you're looking at a home that costs $600,000 and you have a deposit of $120,000. Your loan amount would be $480,000 ($600,000 - $120,000). To calculate the LVR:
Loan Amount: $480,000
Property Value: $600,000
Now, apply the formula:
LVR = ($480,000 / $600,000) x 100 = 80%
In this example, your LVR would be 80%, which is generally considered a good ratio by most lenders in New Zealand.
How to Improve Your LVR
If your LVR is higher than 80%, don’t worry! There are steps you can take to improve it:
Save a Larger Deposit: The more you save, the lower your LVR will be. A larger deposit reduces the amount you need to borrow, which can make you a more attractive borrower to lenders. Plus, a bigger deposit can sometimes help you negotiate better mortgage rates.
Consider a Cheaper Property: Reducing the value of the home you’re buying can also lower your LVR. By choosing a more affordable property, you decrease the loan amount relative to the property's value, which can help you secure a loan more easily. This strategy not only lowers your LVR but also reduces the financial pressure of your monthly repayments.
Pay Down Other Debts: Lenders look at your overall financial health so reducing other debts can improve your borrowing power. Lowering your debt-to-income ratio can increase your creditworthiness, making you a more appealing candidate for a mortgage. It can also free up more of your income, allowing you to save faster for a deposit.
Talk to a Mortgage Adviser: A mortgage adviser can help you understand your situation and explore different lenders and options. They might be able to find a lender willing to accept a lower deposit or offer more favourable terms, even if your LVR is higher than 80%.
Ready to Take the Next Step?
Understanding LVR is just one piece of the home-buying puzzle, but it’s an important one! If you’re feeling a bit overwhelmed or want tailored advice on getting your first home, the team at Group Plus is here to help. Get in touch with us today to chat about your options and start your journey toward homeownership with confidence.