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The mortgage industry is a wide, wondrous world with a language all of its own. One of the many acronyms bandied about is "LVR", which stands for Loan To Valuation ratio. Here’s what it means.
What is LVR?
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the Loan To Valuation ratio (LVR) is one of the most important considerations.
In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80% of the property's value, making your LVR 80%.
LVR is important because different lenders and their respective loan products have different maximum LVRs, and some lenders will only lend up to a certain LVR for small properties, or properties in certain areas.
Most lenders will finance 80% LVR or higher with Lenders Mortgage Insurance while Low Documentation (Low Doc) loans may be limited to 60% LVR without LMI.
More LVR examples
The property value is $800,000, and the required loan amount is $720,000. This would give you a LVR of ($720,000 / $800,000) = 90%
The property value is $625,000, and the required loan amount is $587,000. This would give you a LVR of ($587,000 / $625,000) = 93.92%
Finding a suitable mortgage can be a lot like climbing a dangerous mountain. One bad step and you can be faced with disaster. You'll find that even the most experienced climbers take a guide with them and so should you when looking for a new home loan. Here are 6 strong reasons why you should use the services of a mortgage broker.
1. Save money
With access to over 1400 financial products and direct bank contacts, I can source, negotiate and structure the most suitable home loan for you, which can save you thousands over the course of your home loan.
2. Receive guidance & advice
The Australian lending market has a wide variety of lenders; including banks, credit unions, building societies and mortgage managers. I can guide you through their jargon-filled landscape, to not only help you find the right home loan but to also help you learn along the way.
3. Save research time
Contacting banks and comparing loans online can take time. I have the software, bank contacts and systems in place to quickly filter through the loan products meaning you don’t have to.
4. Avoid the paperwork
I will complete all the necessary paperwork (apart from signing them) and coordinate settlement between the lenders, conveyancers, settlement agencies, real estate agents, builders, etc… making life much easier for you.
5. Gain long-term peace of mind
I’m always here to help; whether it questions about your home loan, ongoing home loan suitability checks, market updates... I’m here to help. And remember, all this at zero cost to you.
6. Avoid any hazards and pitfalls
Many products on the surface seem to offer a great deal. But under the surface, they may include penalties, fees and charges that aren’t obvious. I can help you avoid signing up for any home loan that you may later regret.
The agreed property purchase cost is just one of many expenses you can expect when buying and financing a new property. To provide you with a budgeting guide, I've put together a list of some of the less explicit costs involved in buying a property.
Let's use an example scenario with some assumptions to assist in highlighting the potential costs:
Stamp duty must be paid for mortgage documents to be legal. It’s essentially a tax levied by the WA government on the purchase value of the property. First home buyers may qualify for the WA reduced rate of Stamp Duty.
Mortgage registration fee - $164 (correct as of March 2016)
In Western Australia, all mortgages are registered with Landgate, and they charge a fee for registering the mortgage.
Land transfer fee - $234 (correct as of March 2016)
Certificates of Title, otherwise known as Title Deeds, are issued by Landgate with one original and one duplicate copy. When purchasing property, the transfer of land must be recorded, which Landgate charge accordingly.
See the Stamp Duty calculator to estimate what your government fees could be.
One Off Financing Costs
Loan application fee - Anywhere from $0 to $700.
The loan application fees are commonly charged by a lender for the costs involved in setting up a new home loan. These are also known as “establishment”, “up-front”, “start-up” or “set-up” fees. These fees are commonly waived as part of a lender promotion.
Lenders mortgage insurance (LMI) - $7,668 (based on example LVR of 90% ($360k/$400k) - this will vary depending on your individual circumstances.)
Based on your loan-to-valuation ratio (LVR), you may be required to take out lenders mortgage insurance (LMI). This typically occurs when you borrow more than 80% of the value of the property (can be less depending on property location, employment types, etc...). Although you pay for it, LMI is not insurance for you; it protects the lender should you default on the loan. This can be avoided by saving enough funds to cover 20% of the purchase price + expected costs prior to purchasing.
Valuation fee -Typically from $300 to $400.
Your lender will pass on the cost of getting an independent valuation of the property you wish to purchase. It is not uncommon for a lender to waive this fee as part of a promotion.
Lender's legal fee -Typically from $200 to $300.
Your lender may charge a fee for preparing the documentation associated with the home loan.
Rate lock fee - Typically from $300 to $600.
A rate lock fee is an optional fee only available to Fixed Rate borrowers. Home loan settlements can take many months, and the fixed rate only comes into effect on the date of settlement. A rate lock enables you to lock in a fixed rate from the date of application, which is especially useful if you feel there is a strong chance of an interest rate increase in the coming months. A lender will charge you a one-off fee for this feature.
Other Costs
Legal Fees - Typically from $1000 to $2500.
The legal transfer of ownership of the property will require a solicitor, conveyancer or settlement agent. He or she will perform property and title searches to ensure the seller is entitled to release the property, for instance, by checking the strata body corporate records.
Building Inspections - Typically from $400 to $800.
Building inspections are an option added cost, but they can save you from dealing with a major building problem after the purchase is complete. The amount is often dependent on the size of the property.
Pest Inspections - Typically from $150 to $400.
Pest inspections assess property for damage caused by pests such as termites, rodents, and other little critters. Like building inspections, they are optional, but could potentially save you thousands of dollars.
Council and water rates - Anywhere from $0 to $2000+
When you purchase a property, you are required to pay the seller/vendor the remaining council and water rates from the date of settlement through to the end of the financial year.
Agent fees - Typically 1-3% of the selling price.
First-home buyers don’t have to worry about paying commission, since it is charged to the vendor of the property, most often as a percentage of the sale price. However if you’re selling your current home to buy another, you’ll probably have to take these fees into account.
Building Insurance - Typically from $50 to $200 per month.
If you’re not buying a strata property, your lender will ask you to take out building insurance dated from the time of settlement.
Conclusion
Overall the extra costs on this example purchase could range from $23481 to $28981.
Excluding LMI, its is wise to assume that the extra purchase costs on a property will add approximately 5% of the agreed purchase price to your total funds required to buy the property.
For example, on a $500,000 property purchase (with no need for LMI) you can roughly expect $25,000 in extra costs, meaning you will need $525,000 in total funds to buy the property.
What is this Lenders Mortgage Insurance or LMI all about then? This article gives you a full run down about Lenders Mortgage Insurance and some of the commonly asked questions.
What is Lenders Mortgage Insurance
When you consider that an apartment in Perth could set you back half a million dollars at the moment, saving a 20% deposit to buy that apartment – $100,000 – can seem an insurmountable task. That’s where Lenders Mortgage Insurance can help. Lenders Mortgage Insurance (LMI) is one way of getting into homeownership without having the 20% deposit (or 40% for low document loans), which is typically required by most banks and financial lending institutions.
LMI protects the bank or lender, should you let your home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.
How does LMI work?
Lenders Mortgage Insurance protects your lender against a loss should you as a borrower default on your home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan.
Should this be the case, your lender is entitled to make an insurance claim to the LMI provider for the reimbursement of any shortfall.
What’s in it for you?
For you, it may seem LMI is just another expense to cover. But this insurance can enable you to enter the property market with, for example, only a five per cent deposit saved. In the example above, this brings the deposit down from $100,000 to just $25,000.
And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.
When is LMI payable?
vLenders Mortgage Insurance typically becomes payable when:There are exceptions to the rule though. See below.
For example, if you earn a standard PAYG salary and you purchased a home valued at $500,000 with a $150,000 deposit, you would only be borrowing $350,000 which gives you a Laon to Value Ratio (LVR) of 70%. As this falls under 80%, you would not be required to pay the Lenders Mortgage Insurance.
However, if you only have $50,000 saved for a deposit you would be borrowing $450,000 from the lender giving you an LVR of 90%. In this case, the lender will require you to pay LMI as it will perceive you to be at a greater risk of defaulting on your loan repayments.
What are the exceptions?
There are some exceptions to the rules that may enable you to avoid paying LMI. Some of these include:
In general the only surefire ways of avoiding LMI include:
Who is insured?
Your lender is the insured party, not you, the borrower, nor any guarantor.
LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability.
How is LMI calculated?
LMI is calculated based on two main risk variables to the lender and insurer:
There are other variables that come into consideration too.
Let me know what we can help or any questions.
