LVR meaning | Little known term can hold key to low rates

LVR meaning

The LVR meaning is “loan to value ratio”. It is expressed as a percentage of the loan amount when compared to the value of the property as determined by the lender. So, if you owe $520,000 and the property value is $650,000, then the LVR is 80%.

LVR meaning is important because lenders consider loan to value ratios essential in deciding what interest rate discount borrowers get.

Why LVR and other numbers matter

When a lender assesses a home loan application, they are deciding if the loan fits their risk appetite. The loan to value ratio is one of many measures that form part of a home loan assessment. We cover some of the significant terms besides LVR meaning here.

Credit Score

A credit score can be a measure of borrower credit worthiness. This is where credit reporting bodies pool together some money-related behaviours of an individual to provide them with a credit score. This credit score is an indication of how reliable someone might be with repayments for a new credit product—like a home loan.

Servicing capacity

Lenders measure a borrower’s capacity to afford the loan with a servicing assessment. It is a calculation that considers income, ongoing expenses, and the proposed loan repayments—including the effect any increase to repayments might have.

Property equity

Equity is the difference between what is owed and the property value. If you have an 80% LVR you have 20% property equity.

The loan to value ratio is a way for lenders to measure their risk—and the risk that borrowers could falling into negative equity if house prices dropped. LVR meaning is important to help borrowers understand negative equity—when they owe more than the property is worth.

In our example of an 80% LVR ($520,000) for a property worth $650,000, the borrower has $130,000 in property equity. If the valuation fell to $600,000 and they still owed the same amount, their property equity would also fall to $80,000.

Loan to value ratio – LVR

A home loan with an LVR of 95% would be considered a higher risk home loan than a home loan with an LVR of 60%. Therefore, the 95% LVR home loan would likely need to demonstrate greater strength in the other areas of assessment.

The above assessment tools are just some of the measures considered in the assessment of any loan application. The emphasis on each will depends on the both the lender and borrower type.

Who decides LVR?

The bank and the borrower can both impact the LVR.

The bank orders the valuation. The valuation is usually the price someone paid for a property. In the case of a refinance home loan there is no sale and therefore no contract price so the valuation amount will depend largely on how your property compares to other properties that have sold recently.

The borrower determines the loan limit. Usually, borrowers get the lowest loan possible. Sometimes borrowers keep aside cash buffers, they should carefully consider whether it still suits their objectives if it means borrowing at a higher LVR. As our table shows, it could be a balancing act between loan size and LVR—something a mortgage broker can walk a client through.

LVR impact on interest rates

While LVR is one of the many risk factors lenders consider when looking to approve a loan, it is a major factor banks consider when it comes to the interest rate discounts given to borrowers.

Banks generally reward borrowers who present less risk with lower interest rates. Over time, lenders have settled on LVR tiers as the main point of difference when deciding who receives the biggest interest rate discounts.

In general, for the same loan amount—the lower the LVR, the lower the home loan interest rate.

It makes business sense for lenders to attract larger loans that have low LVRs. So, in addition to LVR, lenders also look at loan size to segment their borrowers. Here is a rough guide:

There can be variations to the above guide but generally speaking, borrowers can be offered lower rates at LVRs under 60% and loan amounts over $750,000 when compared to borrowers asking for smaller loan amounts at higher LVR’s.

LVR impact on home loan options

Like any business, lenders want to make money without taking unnecessary risks. While many borrowers would like to buy with little or no deposit, too many 95% LVR home loans in the system would bring increased risk to the Australian banking industry.

To keep the lending ecosystem strong and healthy, banks need to monitor the number of high LVR home loans they approve. One way they keep cap the number of high LVR home loans they approved is to offer different levels of home loan features according to home loan LVR. Here is a guide as to how lenders will generally provide more options to low LVR home loans.

This table demonstrates how lenders motivate borrowers to bring their LVR down. While not always possible, buyers could come up with a bigger deposit or use a guarantor home loan to improve the LVR. Existing borrowers could add value to their property with a renovation which could, in turn, lower the LVR.

Before committing to a new loan, or varying an existing loan, be sure to understand what LVR tier your loan falls into and if it has any impact on your interest rate discount and other product options. You don’t know what you don’t know so ask—it could save you.

Can I change my LVR to get a lower interest rate?

The answer to this is maybe. The LVR can change a few ways—some you can control and some you cannot.

In practice, LVR changes are not an automatic thing. Lenders do not go around automatically re-assessing property values and changing the LVRs (and interest rates) for normal residential home loans.

Given the strong relationship between LVR meaning and interest rate discounts, I explore a few ways you could initiate a review of your LVR—and your home loan interest rate.

Ask for a review of your rate and LVR

Rather than just ask for a rate review, it might pay to see if an improved LVR tier could see you with an even lower rate.

Lenders are motivated to keep you as a customer so ask them to improve your rate. A mortgage broker will often be able to talk to your lender for you.

Your property value might have improved because of a buoyant real estate market or a renovation. Lenders offer free valuation estimates to give borrowers a guide.

Using our example your value might have moved from $650,000 to $750,000. If the loan remains at $520,000 then the new LVR is now 69%. This is a great situation, especially if the lender is providing greater interest rate reductions for homes loans with LVRs less than 70%.

Refinance home loan

A refinance home loan can be a great way to get new lending rates and in some instances cashback incentives. A refinance home loan can be a good way to have a lower LVR tier recognised by a new lender and possibly get the bigger discounts that can come with it.

Many lenders and mortgage brokers can access valuation tools to provide you with a firm indication your likely LVR prior to completing a formal application for a refinance home loan.

Selling a property

Selling a property often invites a lender to revisit their risk position. They may order a valuation on any remaining properties they hold and advise you how much lending needs to be paid down with sale proceeds. This could change your LVR. If it improves it, you might be able to negotiate a lower rate with your lender.

Reduce your lending

Sometimes you do not need to improve the property value to improve the home loan LVR. Paying down your loan amount can see your home loan LVR also reduce. Importantly – lenders consider the loan limit when calculating the LVR—not the loan balance.

You might be ahead on your home loan because you have been making extra repayments. Using our example, say you are $70,000 ahead on your home loan repayments and so have a loan balance owing of $450,000 instead of $520,000. In this instance the $70,000 is considered available redraw.

Importantly, the lender calculates your LVR based on the limit you can access ($520,000) and the valuation of $650,000 which we know is 80%. But if you do not need access to the funds in redraw, you could reduce the limit to $450,000. Now the new home loan LVR is 69%. If your lender offers bigger discounts to sub-70% LVRs then you might be able to negotiate a better rate with your lender—or refinance.

Final word

The LVR meaning is more than just a banking term. Understanding the LVR meaning can provide the extra leverage a borrower might need when request the home loan interest rate be reviewed.

Lenders use LVR to segment their borrowers into different interest rate brackets. Borrowers who can demonstrate an improved LVR might be able to a getter a lower rate compared to just asking for a rate reduction.

Remember to consider your home loan LVR and its effect on interest rates when dealing with a lender. This is something a lender or mortgage broker is well placed to advise.

*Tables for illustration principles only. How it affects the reader will depend on individual circumstances as well as differences between lenders, product types, borrower types and security types. This is not an exhaustive list.