How to Improve Your LVR and Secure Better Loan Terms
When applying for a home loan in Australia, one of the most critical metrics that lenders consider is the Loan-to-Value Ratio (LVR). Understanding and improving your LVR can significantly enhance your borrowing power, reduce your interest rates, and help you avoid additional costs like Lenders Mortgage Insurance (LMI). This comprehensive guide will explore what LVR is, why it matters, and provide actionable strategies to improve your LVR and secure better loan terms.
What is Loan-to-Value Ratio (LVR)?
Loan-to-Value Ratio (LVR) is a financial term used by lenders to assess the risk of a loan. It is calculated by dividing the loan amount by the lender-assessed value of the property, expressed as a percentage. For example, if you want to buy a property valued at $500,000 and need to borrow $400,000, your LVR would be:
LVR = (Loan Amount/Property Value) x 100 = (400,000/500,000) x 100 = 80%
Why LVR Matters
LVR is crucial because it helps lenders determine the risk associated with a loan. A lower LVR indicates that the borrower has more equity in the property, reducing the lender’s risk. Conversely, a higher LVR means less equity and higher risk. Here are some key points about LVR:
- Lower Interest Rates: Borrowers with a lower LVR often qualify for better interest rates.
- Avoiding LMI: If your LVR is above 80%, you may need to pay Lenders Mortgage Insurance (LMI), which can add thousands of dollars to your loan cost.
- Borrowing Power: A lower LVR can increase your borrowing capacity and improve your chances of loan approval.
Strategies to Improve Your LVR
1. Save for a Larger Deposit
One of the most effective ways to lower your LVR is to save for a larger deposit. The more money you can put down upfront, the less you need to borrow, thereby reducing your LVR. For example, increasing your deposit from 10% to 20% can significantly lower your LVR and help you avoid LMI.
2. Increase the Value of the Property
Improving the value of the property can also help lower your LVR. This can be achieved through renovations or upgrades that increase the property’s market value. For instance, adding a new kitchen, bathroom, or landscaping can enhance the property’s appeal and value.
3. Pay Down Existing Debts
Reducing your existing debts can improve your overall financial position and make it easier to save for a larger deposit. Focus on paying off high-interest debts first, such as credit cards and personal loans, to free up more of your income for savings.
4. Choose a Less Expensive Property
If your LVR is too high, consider purchasing a less expensive property. This will reduce the amount you need to borrow and lower your LVR. While this may mean compromising on certain features or locations, it can be a practical step towards homeownership.
5. Use a Guarantor
A guarantor can help you secure a loan with a lower LVR by providing additional security. Typically, a close family member, such as a parent, uses the equity in their property to guarantee a portion of your loan. This can reduce your LVR and potentially eliminate the need for LMI.
6. Make Extra Repayments
If you already have a home loan, making extra repayments can help reduce your loan balance faster, thereby lowering your LVR. Even small additional payments can make a significant difference over time.
7. Refinance Your Loan
If your property’s value has increased since you took out your loan, refinancing can help lower your LVR. By refinancing, you can take advantage of the increased equity in your property, potentially securing better loan terms and a lower interest rate.
8. Avoid Borrowing Additional Funds
While it might be tempting to borrow additional funds for renovations or other expenses, doing so can increase your LVR. Try to avoid taking on additional debt until your LVR is at a more favourable level.
Benefits of a Lower LVR
1. Better Interest Rates
Lenders often offer lower interest rates to borrowers with a lower LVR because they represent a lower risk. This can result in significant savings over the life of the loan.
2. Avoiding LMI
As mentioned earlier, if your LVR is above 80%, you may need to pay LMI. By lowering your LVR, you can avoid this additional cost, which can be substantial.
3. Increased Borrowing Power
A lower LVR can increase your borrowing capacity, allowing you to potentially purchase a more expensive property or have more funds available for other investments.
4. Improved Loan Approval Chances
Lenders are more likely to approve loans with a lower LVR because they represent a lower risk. This can be particularly beneficial if you have a less-than-perfect credit history or other financial challenges.
Improving your LVR is a critical step towards securing better loan terms and achieving your homeownership goals. By saving for a larger deposit, increasing the value of your property, paying down existing debts, and considering other strategies outlined in this guide, you can lower your LVR and enhance your financial position.
Remember, each borrower’s situation is unique, so it’s essential to consider your circumstances and seek professional advice if needed. By taking proactive steps to improve your LVR, you’ll be better positioned to secure a favourable home loan and build a solid foundation for your financial future.