Strategies for Improving Your LVR
The Loan-to-Value Ratio (LVR) is a crucial metric in the world of property finance, determining how much you can borrow relative to the value of your property. A lower LVR is generally seen as less risky by lenders and can lead to more favourable loan terms. This article explores strategies for improving your LVR, helping you secure better mortgage rates and reduce financial risk.
Understanding LVR
LVR is calculated by dividing the loan amount by the property’s value, then multiplying by 100 to get a percentage. For example, if you borrow $400,000 on a property valued at $500,000, your LVR is 80%. A lower LVR indicates a higher equity stake in the property, which is preferred by lenders as it reduces their risk exposure.
Why LVR Matters
LVR is a critical factor in mortgage lending. Banks use it to assess the risk of a loan application. A high LVR (above 80%) may require you to pay Lender’s Mortgage Insurance (LMI), which protects the lender if you default on your loan. Conversely, a lower LVR can lead to lower interest rates and fewer additional costs.
Strategies to Improve Your LVR
- Increase Your Deposit
- Save More: Increasing your deposit is the most straightforward way to lower your LVR. By saving more before purchasing a property, you can reduce the amount you need to borrow.
- Government Assistance: Consider government schemes like the First Home Grant, which can boost your deposit if you meet certain criteria.
- Choose a Less Expensive Property
- Opting for a property that costs less can naturally improve your LVR since you’ll need to borrow less. This approach can also make it easier to enter the property market and build equity over time.
- Increase Property Value
- Renovations: Invest in home improvements that increase the property’s market value. This can enhance your equity position without additional borrowing.
- Revaluation: If property values in your area have increased, consider getting your property revalued to reflect its current market value, thereby improving your LVR.
- Reduce Your Loan Amount
- Make Extra Payments: Regularly making additional payments towards your loan can reduce the principal amount, thereby improving your LVR over time.
- Lump Sum Payments: Use bonuses, tax refunds, or other windfalls to make lump sum payments on your mortgage.
- Consider Non-Bank Lenders
- Non-bank lenders often have more flexible lending criteria and may offer solutions for those with higher LVRs. They can be a viable option if traditional banks are not meeting your needs.
- Utilise a Guarantor
- A family member can act as a guarantor, using their equity to help you secure a loan with a lower LVR. This can be particularly beneficial for first-time buyers struggling to save a large deposit.
Impact of Reserve Bank Changes
Recent changes by the Reserve Bank have eased LVR restrictions, allowing banks to lend more to borrowers with smaller deposits. For owner-occupiers, the limit for loans with an LVR above 80% has increased, making it slightly easier to secure a mortgage with a lower deposit.
Improving your LVR is a strategic move that can lead to better mortgage terms and reduced financial risk. By increasing your deposit, selecting less expensive properties, enhancing property value, and exploring alternative lending options, you can effectively manage your LVR. As the lending landscape evolves, staying informed about regulatory changes and leveraging available resources will be key to achieving your property ownership goals.