Loan to value ratio, often referred to as LVR, is an important calculation to keep in perspective when purchasing property with finance.
The way to calculate loan to value ratio is divide the loan amount by the actual property purchase price or valuation (whichever is the lower).
$80,000 loan ÷ $100,000 purchase price or valuation =0.8 x 100 = 80% LVR
With most banks and lenders this is a loan that would not require mortgage insurance from a full documentation applicant in most areas. 80 percent LVR is also commonly the maximum most main stream lenders will lend to a low documentation applicant.
A no deposit home loan is typically 100 percent loan to value ratio and a 100 percent loan is suitable for many first home buyers who are eligible for the full first home owners grant. First home owners can use the grant to cover most the loan insurance and in some states they do not have to pay purchase stamp duty meaning they really only need an extra few thousand dollars if the property they are purchasing is not highly priced.
Loan applicants who are not eligible for the first home owners grant and have no real deposit available will be required to pay purchasers stamp duty in many cases and a 105 percent or even a 106 percent loan to value ratio loan will be required by these loan applicants top cover all the purchase costs that will be incurred.
Loan to value ratio can be reduced to 80 percent of the purchase price while still borrowing an actual 100 percent of the purchase price with the help of a security guarantor with a limited guarantee. The way this type of finance works is where a family member or even a friend with existing equity in another property puts up a portion or a limited security guarantee in their property to reduce the loan to value ratio in the new property to be acquired.
Equity Guarantee LVR Example
|Property purchase price||
|Costs for this purchase||= $3,711|
|Required loan size||= $103,711|
|Loan to Value Ratio||=104 percent|
|Friends Property||=$350,000 value|
|Friends LVR||=14.28 percent|
|Friend puts up $20,746 in security from their property|
|New property LVR is now 80 percent, no mortgage insurance required|
|Friends LVR becomes||=20.21 percent|
|Friend still has almost 60 percent equity to access before mortgage insurance would become applicable. Loan applicants have borrowed 100 percent of the purchase price and all costs without having to pay lenders mortgage insurance.|
As the loan size for the newly acquired property is reduced and if property values increase over time the equity increase in the newly acquired property could grow to a point where the security guarantee from the friends property is no longer required.
At this time a request could be lodged to release the friends property as a security for the loan. This would leave the newly acquired property securing the remaining loan by its self.