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Loan to Value Ratio (LVR) is the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. It is calculated by dividing the loan amount by the value of the property that the loan is for and multiplying by 100. e.g. If you buy a $500,000 property and need a $350,000 loan, your LVR is:
($350,000 ÷ $500,000) x 100 = 70%.
If you borrow more than 80% of the value of a property (LVR) you usually have to pay Lender’s Mortgage Insurance (LMI), which protects the lender if you default on your loan. This means that the bank’s loss is covered by the insurer to which the LMI premium is paid.
LMI can be a huge cost, so understanding how LMI works can potentially save you thousands. LMI premium rates also differ depending on the amount you borrow, as well as the lender and product you choose. LMI can also be capitalised on top of the borrowed amount and is not a recurring insurance premium as such, just a one-off.
LMI premiums are calculated according to LVR. The higher the LVR, the greater the cost of the LMI premium. The cost of LMI also differs from lender to lender.
Achieving the dream of homeownership is, for many people, one of the most exciting accomplishments in life.
It can also be one of the most difficult challenges, due to the length of time it takes most people to save the traditional 20% deposit and the sacrifices they make throughout the process.
By reducing lender’s risk at the outset, LMI allows borrowers to secure a mortgage for a home or even their second home or property with a deposit as low as 5%. This takes away much of the difficulty of saving a deposit.
Your lender or broker will prepare all the necessary information and documentation and will advise whether or not your loan requires LMI, the cost of the premium and any additional information that may be required.
For certain professionals, Shore Financial can access benefits where LMI can be waived.
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