How to Improve Your LVR
Improving your Loan-to-Value Ratio (LVR) is crucial for enhancing your borrowing power and securing better mortgage terms. LVR is a key metric that lenders use to assess the risk associated with a home loan. This article provides a comprehensive guide on how to improve your LVR, tailored to the local market.
Understanding Loan-to-Value Ratio (LVR)
LVR is calculated by dividing the loan amount by the lender-assessed value of the property. For example, if your property is valued at $500,000 and you have a $100,000 deposit, you need to borrow $400,000, giving you an LVR of 80% ($400,000 ÷ $500,000 = 80%). The Reserve Bank has set LVR restrictions to ensure financial stability, requiring a minimum deposit of 20% for owner-occupiers and 30% for investors.
Why Improving Your LVR Matters
- Lower Interest Rates: A lower LVR often qualifies you for better interest rates, reducing your overall borrowing costs. Lenders view lower LVRs as less risky, which can translate into more favourable loan terms.
- Avoiding Lenders Mortgage Insurance (LMI): If your LVR exceeds 80%, you may need to pay LMI, which protects the lender if you default on your loan. Improving your LVR can help you avoid this additional cost.
- Increased Borrowing Capacity: A lower LVR can enhance your borrowing capacity, making it easier to secure a loan for your desired property.
Strategies to Improve Your LVR
- Increase Your Deposit: The most straightforward way to improve your LVR is to increase your deposit. This can be achieved through savings, selling assets, or receiving financial assistance from family members. For example, if you increase your deposit from $50,000 to $100,000 on a $500,000 property, your LVR improves from 90% to 80%.
- Reduce Your Loan Amount: Another effective strategy is to reduce the amount you need to borrow. This can be done by purchasing a less expensive property or using additional funds to lower the loan amount. For instance, opting for a property valued at $450,000 instead of $500,000 can improve your LVR if your deposit remains the same.
- Increase the Property Value: Enhancing the value of your property through renovations or improvements can also improve your LVR. Upgrading kitchens, bathrooms, or adding extensions can significantly increase the property’s value, thereby lowering your LVR.
- Make Extra Repayments: Making additional repayments on your existing mortgage can help reduce the loan amount faster, improving your LVR over time. Even small, regular extra payments can make a significant difference in the long run.
- Refinance Your Loan: Refinancing your mortgage with a new lender who offers a better valuation of your property can improve your LVR. This is particularly useful if the property market has appreciated since you purchased your home.
Practical Steps to Implement These Strategies
- Create a Savings Plan: Develop a detailed savings plan to increase your deposit. Set realistic goals and timelines, and consider using high-interest savings accounts or term deposits to grow your funds faster.
- Evaluate Property Options: Consider properties that are within your budget but still meet your needs. Work with a real estate agent to identify properties that offer good value and potential for appreciation.
- Plan Renovations Wisely: If you decide to increase your property’s value through renovations, plan the upgrades carefully. Focus on improvements that offer the highest return on investment, such as kitchen and bathroom remodels.
- Make Regular Extra Payments: Set up automatic transfers to make extra repayments on your mortgage. Even small amounts can add up over time and significantly reduce your loan balance.
- Consult with a Mortgage Advisor: Seek advice from a mortgage advisor to explore refinancing options. They can help you find lenders who offer better property valuations and more favourable loan terms.
Potential Challenges and Solutions
- Saving for a Larger Deposit: Accumulating a larger deposit can be challenging, especially with rising living costs. Consider cutting back on discretionary spending, taking on additional work, or selling non-essential assets to boost your savings.
- Property Market Fluctuations: Property values can fluctuate, affecting your LVR. Stay informed about market trends and consider timing your property purchase or sale to take advantage of favourable conditions.
- Renovation Costs: Renovations can be expensive and may not always result in the desired increase in property value. Obtain multiple quotes, set a budget, and focus on cost-effective improvements that add the most value.
Improving your Loan-to-Value Ratio (LVR) is essential for enhancing your borrowing power and securing better mortgage terms. By increasing your deposit, reducing your loan amount, increasing your property value, making extra repayments, and refinancing your loan, you can effectively lower your LVR. Implementing these strategies and overcoming potential challenges will help you achieve a healthier financial position and make you a more attractive borrower to lenders. Taking the time to improve your LVR will not only benefit you in the short term but also contribute to your long-term financial stability and success.