Loan to
Value Ratio

LVR represents a percentage of the value of the home loan to the value of the property.

First thing First

Why must borrowers familiarise themselves with LVR as a first home buyer?

As a first-time homebuyer, understanding the Loan to Value Ratio (LVR) is crucial because it reflects the percentage of a property’s value that borrowers will need to borrow to make the purchase. It directly influences their borrowing capacity.

A higher LVR means they are borrowing a larger portion of the property’s value, which increases the risk for both them and their lender. This elevated risk could lead to diminished negotiating power regarding interest rates.

A lower LVR, conversely, decreases the risk for both parties. This enhanced security can boost borrowers’ negotiating leverages, potentially leading to better loan terms. Thus, understanding LVR not only helps first home buyers in securing a favourable deal but also in purchasing their first home with minimized financial risk.

Lender’s Mortgage Insurance (LMI)

It is an insurance that lenders require borrowers to take out when the Loan to Value Ratio (LVR) exceeds 80%. This insurance is designed to protect the lender, not the borrower, in the event that the borrower is unable to meet their loan repayments or defaults on the home loan, and the sale of the property does not cover the outstanding loan amount.

Paying LMI allows borrowers to purchase a home with a smaller deposit (less than 20% of the purchase price), but it’s important to note that the cost of LMI can be significant and is usually added to the loan amount, increasing the overall loan cost and monthly repayments. Understanding LMI and its implications is vital for first home buyers as it directly impacts the upfront and ongoing costs of purchasing a home.