You may have heard mention of 'LVR'. It's a crucial term relating to whether or not first home buyers (in particular) can access mortgage finance, and gives banks some guidance on who, and how much, they should be lending. But LVR quickly falls into the 'jargon' bucket and many people brush past it, however recent changes mean it's becoming far more instrumental in whether people can get a mortgage or not.
Before we dive into why recent regulatory changes mean massive implications in getting your first home, let's first explore what LVR is, and why it matters.
What does LVR stand for?
LVR stands for Loan to Value Ratio and looks at the amount of loan someone can get versus the value of his or her property. For example, an 80% loan to value ratio on a property worth $400,000 means the bank would be lending $320,000. In some cases, a bank can lend 90% of the property's value.
Most banks will lend up to a maximum of 80% of a property's value. This means the other 20% of the money needed to purchase it is to be typically supplied by the borrower (you) and usually in the form of a deposit.
Most mortgage applicants flip this around, meaning they figure out how much deposit they need and calculate 20% of the property's market value.
Can banks lend more than 80%?
Yes, they can, and this is where the LVR comes into play. Before recent Reserve Bank announcements, banks were only allowed to have 15% of their total mortgage portfolio consisting of mortgages where they'd lent more than 80% LVR. . The borrowers who qualified for those mortgages would have applied for a loan with less than a 20% deposit and would have been fortunate to do so.
So getting a mortgage with less than a 20% is indeed possible, and it's also just become easier to get one.
Recent LVR changes
Recently the Reserve Bank, which controls the LVR regulations, announced an easing of these restrictions. The goal posts were relaxed a little for the Banks from only being allowed to lend 15% of their home loan portfolio to customers with less than a 20% deposit to allowing banks to lend 20% of their portfolio to these low deposit customers.
This is great news for first home buyers, where getting a 20% deposit saved in high house price areas can often seem impossible !
It is worth noting that getting a mortgage with a lower deposit can come with a few restrictions and extra qualifying criteria, and it's always worth checking with your mortgage broker to see what it may mean to get a mortgage with less than a 20% deposit. This can include higher interest rates, fixed interest rates for certain periods of time, or specific rules in relation to the property's location or condition.
But combining these new LVR changes with lower interest rates and getting a mortgage is now slightly more affordable than before.
At time of writing (December 2018) we have lenders offering 3.95% interest rates fixed for 12 months, and others offering 4.10% for one year fixed rate mortgages.
To see if either of these recent market changes could make a difference to your mortgage application or budgeting then why not book a FREE consultation with your local Stephanie Murray Mortgages advisor. Their specialist knowledge and expertise in the field will quickly help you understand your situation, even if you think you might be months or years away from buying. Knowledge is power !