Understanding LVR and Lenders Mortgage Insurance in Australia

Loan-to-Value Ratio, commonly called LVR, is one measure that lenders may use when assessing a property loan application. Understanding what LVR means, how it is calculated and what it may mean for your borrowing situation can help you prepare before speaking with a lender or mortgage broker.

This guide also explains Lenders Mortgage Insurance — what it is, who it protects, when it may apply and how it may be paid.

Loan-to-Value Ratio, or LVR, is the loan amount expressed as a percentage of the lender's assessed property value. It represents how much of the property's value is being funded by the loan, compared with how much is being funded by the deposit.

Lenders use LVR as one measure of lending risk. A higher LVR means the borrower is contributing a smaller proportion of the property's value from their own funds. This may increase the lender's exposure if the borrower defaults or the property is later sold for less than the outstanding loan balance.

It is important to note that the lender may use its own assessed value of the property rather than the purchase price. If the lender's assessed value is lower than the purchase price, the effective LVR will be higher than a calculation based on the purchase price alone.

Many lenders use 80% LVR as an important threshold in their lending policies. Above this level, additional requirements or costs, including Lenders Mortgage Insurance, may apply depending on the lender, loan product and borrower circumstances.

An 80% LVR generally means the borrower is contributing approximately 20% of the lender's assessed property value from their own funds. This is often described as having a "20% deposit", although the figure used for lending purposes is generally based on the lender's assessed value and may not be the same as the purchase price.

It is important to note that not all lenders use the same thresholds or policies. Some lenders may apply different rules above or below 80% LVR. Always confirm requirements with your lender or a licensed mortgage broker.

Lenders Mortgage Insurance, commonly called LMI, is insurance that may be required by a lender when a borrower has a higher LVR. It is a cost that can be associated with borrowing a larger proportion of a property's assessed value.

LMI is not a universal charge applied by every lender or to every loan. Whether it applies, and the LVR threshold at which it may apply, depends on the lender, loan product, borrower circumstances and any applicable government scheme, professional concession or lender exemption.

The cost of LMI can vary depending on factors including the loan amount, LVR, lender, mortgage insurer and borrower circumstances. It can be a significant cost on larger loans or loans with higher LVRs.

LMI does not protect the borrower's equity, reduce the borrower's repayment obligations, or provide any financial benefit to the borrower in the event of default. It is insurance taken out for the lender's benefit.

Borrowers who have paid an LMI premium should not confuse this with income protection insurance, mortgage protection insurance, or any other product that may provide financial protection for the borrower personally.

LMI may apply when a borrower has an LVR above a lender's threshold, commonly around 80%, although this varies between lenders. Requirements depend on the lender, loan product, borrower profile and property.

Eligible buyers may be able to purchase with a smaller deposit without paying LMI under certain government-backed schemes. Eligibility criteria, availability and scheme rules vary and may change over time.

Some lenders may also offer LMI concessions or exemptions for particular borrower groups or professions. These are not universal and should be confirmed directly with the lender.

LMI may be paid in different ways, depending on the lender's policy and the loan structure:

• Upfront payment: The LMI premium is paid as a lump sum at or before settlement.
• Added to the loan: Subject to lender approval and applicable lending limits, the LMI premium may be added to the loan balance. This increases the total amount borrowed.

Where LMI is added to the loan, interest may be charged on the higher balance over the loan term. This can increase the total amount repaid. Confirm the available payment options, premium amount and total cost with your lender.

Increasing the deposit generally reduces the loan amount required, which in turn reduces the LVR. A lower LVR may reduce the likelihood of LMI applying and may provide access to a broader range of loan products, depending on the lender.

However, saving a larger deposit can take additional time. Buyers should also retain enough funds for transfer duty, conveyancing, inspections, lender fees, settlement adjustments, moving costs and other purchasing expenses rather than using all available savings for the deposit.

A lower LVR does not guarantee loan approval or a lower interest rate. Lenders also consider factors such as income, expenses, existing debts, credit history, serviceability, property type and loan purpose.