July 22, 2018

# What is loan-to-value ratio (LVR) & how does it affect interest rates?

In the home loan market, a common term you may hear is loan-to-value ratio, or LVR. We explain exactly what it is and how it can affect your home loan interest rate.

## What is a loan-to-value ratio?

A loan-to-value ratio (or ‘LVR’ as it is commonly referred to in the industry) is the VALUE of a property in comparison to the amount of money being borrowed (in a loan) – calculated as a percentage. It is used by lenders to assess the risk factor of a loan.  The lower your LVR percentage, the less of a risk that particular loan is to a potential lender.

Keeping track of your LVR when house hunting is important as it gives you a good indication of the buying power of the deposit that you’ve managed to save. A good LVR can also help you avoid certain fees that sometimes get applied to home loans (eg. LMI or ‘Lenders Mortgage Insurance’).

## How to calculate your LVR

Lenders typically calculate your LVR by dividing the loan amount by the property’s value and multiplying it by 100.

For example, if John was looking at a property which had a valuation of \$450,000 (not its price – but its value) and he had a \$90,000 deposit, he would need to borrow \$360,000.

By dividing \$360,000 (the loan amount) by \$450,000 (the valuation of the property), we get 0.8 which, multiplied by 100, means that John’s loan-to-value ratio is 80%.

Property value

(not price)

Deposit Loan amount LVR

(Loan-to-value ratio)

\$450,000 \$45,000 \$405,000 90%
\$450,000 \$67,500 \$382,500 85%
\$450,000 \$90,000 \$360,000 80%
\$450,000 \$112,500 \$337,500 75%
\$450,000 \$135,000 \$315,000 70%
\$450,000 \$175,000 \$275,000 60%

## How can LVR affect your interest rate?

LVR can affect your interest rate because many lenders actually apply a higher interest rate to higher LVRs. Not many people realise or understand this. If more people were aware of this, perhaps they would do more to reduce the amount of their loans (by potentially buying a property in a lower price bracket) and wait longer to build up the size of their deposit.

Another negative impact of a higher LVR is the application of Lender’s Mortgage Insurance, or LMI, which acts as something of a safety net to the lender should you be unable to make your monthly loan payments. It can vary in price depending on the lender and what LVR percentage you have, but can leave you out of pocket if you aren’t careful. The lending industry average LVR where LMI is applied is from approximately 80% and higher. And what does LMI cost? Of course, it is different for almost every loan but according to the Genworth LMI estimator, if you have an LVR of 90% on a \$450,000 loan for up to 30 years, you could be paying an LMI premium of \$7,776. That’s almost \$40 per month extra on your loan repayments across the life of the loan!

Case study

Tim was looking at houses for \$450,000 and had \$22,500 in his savings. If he had calculated his loan-to-value ratio before applying for a loan, he would have discovered that he had an LVR of 95%. Because of this high ratio, the lender thought he was too high of a risk and rejected his application.

Tim decided against buying the house and saved up until he had \$90,000 in his savings – which achieved an LVR of 80%. When he reapplied for the loan, it was approved by the lender and he didn’t have to pay any LMI.

## Final word

House hunting can be a stressful time. Calculating your LVR can be a great way to guide you on the types of houses you can afford and potentially save you from any nasty surprises when it comes to applying for a home loan.

# How the Reserve Bank Cash Rate Impacts Home Loan Rates

When you look at home loans and compare mortgage rates, you may encounter the term “Reserve Bank cash rate” or simply “cash rate”. This refers to the market interest rate on overnight loans among financial institutions. It is monitored by the Reserve Bank of Australia which is the country’s central bank and has the ability to increase or lower the official cash rate. This is through basis points to manage economic inflation.

The Reserve Bank of Australia covers the country’s monetary policy and discusses how to manage it. The Governor will then release a statement which influences various aspects not only home loans but also bonds and stocks, deposits, and bank rates.

So how does the Reserve Bank cash rate affect home loan rates? Based on the set cash rate, banks will make adjustments to the fees and charges to their products. As the RBA raises or cuts the cash rate, banks will also change their interest rates for home loans. This strong influence can be seen particularly in variable rate home loans. In other words, the Reserve Bank cash rate plays a significant role on what the interest rates on home loans will be, as well as the amount of repayments you need to handle each month. That is why it is important to be aware of it when you compare mortgage rates.

Now that we’ve seen the impact of cash rate on home loans, bear in mind that financial institutions are not required to take on the changes in cash rate, but not following it will do more harm than good. For instance, they may get a bad reputation should they fail to consider a cut in cash rate which means lower interest rates for the customers.

Cash rate is a crucial component on how much interest rate banks will charge customers on their home loans. That is why it is very important to understand the rates your bank implements, so you will have an idea of how high your repayments will be per month. You can likewise do your own research. Many websites of banks offer a home loan calculator that can give you an estimate of your monthly repayments. But since you can only get estimates, it is still better to seek help from a financial expert so you will know how to compare mortgage rates and choose what meets your requirements.

Got other tips on how to compare home loans and mortgage rates? Share your ideas in the comments section.

# How to Use a Mortgage Repayment Calculator

Planning to buy your first home or investment property in Australia? A home loan will be able to help you achieve your goal. There are several banks and other financial institutions that offer different home loans. One important step is to compare home loans and mortgage rates to ensure that you’ll get the best deal.

There are different aspects to look into and factors to take into account when it comes to home loans in Australia. One of the main considerations is to make sure that you’re capable of covering the monthly payments. The amount depends on the actual value of the loan and other factors but in general, it may take a long time for a home loan to be fully paid so it is important to know how much you need to pay on a regular basis.

One way to get an idea of the monthly repayment is through the use of a mortgage repayment calculator. Not only will this provide estimates of your mortgage repayments but also aid you in deciding which home loan type fits your requirements and financial situations.

A home loan calculator is pretty straightforward. All you need to do is indicate the loan amount, interest rate, and the term of home loan. You also need to include the payment type and how frequent you prefer to make payments. The home loan calculator will give you an estimate of the monthly repayment based on the figures you’ve indicated. Also, you can indicate different figures, loan terms, payment frequency, and payment types to see which best suits your capacity to pay.

Some home loan calculators even have a function that enables you to compare home loans. With figures displayed side by side, you can easily see the differences of home loans and identify the most appropriate loan setup for you.

One important thing to keep in mind is that the mortgage repayment calculator can only give estimates of your monthly repayments. You can only use this online tool as a guide and should not be considered as the sole resource for calculating how much you need to pay for your home loan. While it is a helpful resource, it is still better to seek advice from the experts so you will better understand how a home loan works before entering any contract or agreement.

We have a Mortgage Repayment Calculator in the tools section of our website. Click here.

Do you know other things worth considering in relation to home loan calculators? Share your ideas in the comments section.

# What is Lenders Mortgage Insurance?

If you’re planning to get a home loan and doing a research on offerings of financial institutions in Australia, you may have encountered the term “Lenders Mortgage Insurance” (LMI). This offers protection to the lender in the event that the borrower can no longer pay loan repayments. This is very different from the mortgage protection insurance which offers coverage for your mortgage in case of death, sickness, disability, or unemployment.

LMI  protects the lender against any loss that they may incur as a result of the borrower not being able to make their loan repayments. It protects the lender against risk of default, therefore they will be more likely to approve the loan with this policy in place.

Usually a bank of financial institution require you to pay a 20% deposit on the property you are purchasing in order to give you a loan. However, if you don’t have 20%, you might be required to pay LMI instead, which may allow you to borrow a higher portion of the property’s purchase price.

LMI just forms a part of the lender’s policy and home loan products. So how can you choose the best deal on a home loan? Here are several things to consider:

### Compare home loan rates

Financial institutions vary in the cost of their lenders mortgage insurance. Make sure to compare mortgage rates to find the one that meets your requirements and financial situation. By having a higher deposit and no requirement for LMI, might mean you can get a cheaper interest rate on your home loan. Therefore just because LMI might enable you to borrow more, this might cost you more money.

### Use a home loan calculator

When comparing  home loans, you can use a home loan calculator. This helps you determine the estimated amount of what you need to pay. Take note, however that the results can be used only for reference, factors such as the borrower and security types, and purpose of the loan affect the cost of annual premiums.

### Know the factors that affect LMI

Lenders mortgage insurance can be based on several factors. These include the amount of loan that you need, the amount of deposit that you have, and whether it’s a residential property or as an investment. It will come down to the individual insurance company requirements and calculators when calculating how  much you will be charged.

Lenders mortgage insurance can help you achieve your dream of having your own home. But before anything else, make sure to know the ins and outs of this insurance. Compare home loan rates and do your research. You can also seek advice from a professional so you can better understand the factors that can affect your lenders mortgage insurance, and home loan in general.

Do you know other tips on home loan comparison and how to compare mortgage rates in Australia? You can share your ideas in the comments section below.

# Five Reasons Why Having a Loan Approval in Place is Important

There’s no point wasting your time searching for or getting emotionally attached to a property if you can’t make an offer on it.

It’s a sunny Saturday, and you’re prepping for a spot of house shopping. You’ve got a shortlist of properties to see, an inspection checklist, your significant other, and a strong coffee. But, have you got your finance sorted out?

Before you start doing any inspections, you need to get a loan approval. Here’s why:

### 1. You know you can get a loan

There is no point doing open house inspections and getting excited about a property if you have no assurances that a bank will lend you money to buy it. Get approval before you waste any Saturdays.

### 2. You can be more choosy

You must compare home loans to get the best deal. While the interest rate is important, you need to consider the entire cost of having a loan, and any discounts you can get on your banking. Organising pre-approval gives you time to shop around for the best home loan for you.

### 3. Have realistic price expectations

It’s all well and good to use a home loan calculator at home, but until you have pre-approval, you have no idea how much you can actually borrow. Getting pre-approval means you don’t waste time on properties that you just cannot afford.

When you find the right property, you need to move fast for two reasons. It ensures no one else gets a chance to buy it before you, and gives you a bit of bargaining power. Being able to move ahead quickly will entice some buyers and can use this to negotiate the price lower. Loan approvals in Australia take time, so don’t leave it until you’re negotiating.

### 5. It makes the negotiations process less stressful

There will be a million things to think about and do when negotiating for a property. The last thing you want is to be chasing a payslip from five months ago to give to a bank. If you have a pre-approval, you just call the bank and provide them with the address and sale price. No stress.

So, before you spend hours poring over real estate listings or plodding around open houses get yourself a pre-approval. It will save you stress, time and money.

# Why some Young Australians are Buying an Investment Property as their First Home

According to the NAB Residential Property Survey released in 2016, there is an increasing number of young, first-time Australian buyers of investment property. It was found that for the third quarter of that year, first-home investors account for 12.2 percent of all new property sales which is higher compared to the 11.1 percent posted in the second quarter.

Why do some young Australians prefer investment property? The survey shows that first-time investors like flexibility. They can invest in property in other locations which offer lower rates, while at the same time, rent in the city.

It’s never too young to join the investment property bandwagon, but before entering the real estate market, there are various things to take into account so you can get the most out of your chosen investment and minimise risks.

### Know the ins and outs of real estate and property investing

Buying an investment property is a major decision, that’s why it is important to educate yourself on how the market works. It costs a lot of money and if you’re not knowledgeable enough, you may end up paying more than you should. But don’t worry. There are a lot of resources online that cover what investors need to know.

Aside from educating yourself with online resources on real estate and investing, you can seek advice of qualified professionals. Obviously, they understand the market better, so they can give you helpful insights on home loan comparison, investment strategy, and borrowing capacity.

### Save early

One common mistake of those who want to venture into property investing is that they fail to save as early as possible. Young Australians can take advantage of time. This is one great asset since savings have a lot more time to grow. Save early and make saving a habit. Eventually, you’ll have enough disposable income to buy investment property.

### Compare home loans

In a competitive market such as investment loans, it pays to have a better understanding of mortgage products. To lower your repayments, you can look for features such as lower ongoing fees, offset account, and a redraw facility. It is likewise essential to compare mortgage rates and choose what suits your needs and financial situation.

### Use a home loan calculator

This is a great tool to compare home loans and have a better idea of how much an investment property would cost. There is also a home loan repayment calculator that you can use to get the minimum monthly repayments and interest paid.

Got other tips on how to compare mortgage rates and home loans? You can share your ideas in the comments section.