Saving a 20% deposit can be tough. High LVR (loan-value-ratio) home loans can help you purchase a property with as little as 5%. Here’s what you need to know.
Loan-to-value-ratio (LVR) is the value of your loan (how much you want to borrow) vs the value of the property.
LVR is calculated as a percentage that a lender will use to decide how much risk you pose as a borrower.
A high LVR loan reduces your deposit requirement. “High” means the amount of money you want to borrow more than 80% of the property’s value. Generally, these loans are considered higher risk by lenders.
Due to this risk, high LVR home loans in most cases will attract lenders mortgage insurance (LMI) and higher interest rates. More on these in moment.
Let’s look at two examples of LVR on a property valued at $550,000:
High LVR home loan (less than 20% deposit saved)
You have $70,000 saved as a deposit so you’d need to borrow $480,000.
This is 87.27% of the purchase price which most lenders consider a high lvr home loan because it is above 80%.
Lower LVR home loan (20% deposit saved)
Now let’s say you had a $110,000 deposit saved for the same property. You’d need to borrow $440,000.
This is 80% of the purchase price.
High LVR home loans can work out more expensive for the borrower compared to a home loan at less than 80% LVR.
This is due to the additional cost of lenders mortgage insurance (LMI) and higher interest rates.
In most cases, LMI applies to high LVR home loans. LMI is insurance for the lender that protects them if you default on your repayments.
Generally speaking, LMI is worked out as a percentage of your loan based on your LVR.
Percentages will vary between lenders and mortgage insurers so it’s something important to consider when comparing home loans. Doing your LMI homework can save you thousands.
To calculate your LMI premium, multiply the lenders LMI rate by your loan amount.
For example, if the LMI rate is 0.90% and you are borrowing $350,000 this is worked out as 0.90% x 350,000 = $3150.
LMI is charged as a once-off fee. You can pay it as a lump sum at settlement or have it added to your home loan amount.
Remember, if it is added to your mortgage, you will pay interest on LMI which will increase your monthly repayments.
LMI isn’t transferable if you decide to switch home loans but you may get a discount on your new LMI premium if you refinance your home loan with the same lender.
There can be exceptions to paying LMI on high lvr home loans; if your parents can go guarantor or you qualify for the First Home Owners Deposit. In these cases, LMI is waived.
Some lenders also waive LMI for certain types of professionals. For example, doctors, lawyers, and accountants.
High LVR home loans generally attract higher interest rates because the loan is seen as riskier.
Lenders offer lower interest rates and more competitive home packages to borrowers with 20% or more deposit.
If you have a small deposit and decide a high LVR loan is the way to go, shop around to make sure you’re getting the best deal possible.
Get into the property market sooner.
In some cases, you may come out ahead in capital gains or rental income by paying LMI and higher interest rates than waiting to save the 20% deposit.
Alternative to saving a 20% deposit for first home buyers.
Can be an option for investors who don’t want to use a lot of cash to fund the property purchase.
LMI is tax-deductible for investment properties.
Interest rates are usually higher.
Even a slightly higher interest rate can cost thousands extra compared to a more competitive home loan package.
You may have to pay LMI which adds to the overall cost of the loan.
If you can, pay LMI upfront instead of rolling it into the mortgage to save on interest