At The Happy Finance Company, we believe that understanding the financial world should be as bright and sunny as our name suggests. Today, we're shedding light on another term that might have left you scratching your head: Loan to Value Ratio, or LVR. We'll break it down, explain why it matters, and even share some tips on how to reduce your LVR for a brighter financial future.

What is Loan to Value Ratio (LVR)?

Let's start with the basics. Loan to Value Ratio, affectionately known as LVR, is like a window into your property transaction. It tells you what portion of a property's total value you're borrowing. To put it simply, if you're purchasing a property valued at $200,000 and you have a $50,000 deposit, your LVR is 75% because you're borrowing 75% of the property's value.

Why LVR matters

Your LVR is not just a random number; it's a key factor that lenders pay close attention to. Why, you ask? Well, it can influence the interest rate you qualify for and even affect how much a lender is willing to lend you. Lenders tend to view borrowers with a lower LVR as less risky, which can be your golden ticket to better loan terms.

Calculating your LVR

So, how do you calculate this magical LVR number? It's simple, really. Just use this formula: (Loan amount / Value of property) x 100 = LVR. For instance, if you've taken out a $500,000 loan for a home valued at $600,000, your LVR would be 83%. Easy peasy!

Low LVR = The happy path to lower risk

It's a universal truth – lower is better when it comes to LVR. Borrowers with lower LVRs are less burdened by debt and are seen as lower risk by lenders. At The Happy Finance company, we're all about helping you find the best loan path with the least risk.

Why lenders care about LVR

Lenders consider various factors when reviewing your home loan application, and your LVR is a significant piece of the puzzle. A high LVR (greater than 80%) may make the loan appear riskier. In contrast, a lower LVR indicates more equity in the property and increases your chances of securing a lower interest rate.

Handling an 80%+ LVR

Don't worry if your LVR is over 80%. Many lenders offer loans to borrowers in this category, depending on your individual financial situation, employment history, and credit rating. However, if your deposit is less than 20% of the property's value, your lender might ask you to pay for Lenders Mortgage Insurance (LMI) to get your loan approved.

Lowering your LVR to under 80%

A Brighter Financial Future Now, let's explore how you can bring down that LVR to less than 80% and unlock some fantastic benefits like avoiding LMI and potentially accessing better interest rates. Here are some strategies:

Valuation vs. purchase price

Should you use the valuation or the purchase price when calculating LVR? It depends. In many cases, lenders will choose the lower of the two to determine your loan-to-value ratio. This often happens in off-the-plan purchases or when a property is purchased from a family member at a discounted price, also known as favorable purchasing. Keep in mind that in favorable purchases, some lenders might use the property's value instead of the purchase price. Be prepared for stamp duty based on the property's value in such cases.

At The Happy Finance Company, we're here to ensure your financial journey is filled with sunshine and smiles. Contact us, and let's chart a path to your brighter financial future!

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