What is Loan to Value Ratio (LVR)?

When you first take on a mortgage, the repayments may seem high. You may need to ease back on some spending and cut back on luxuries you may be used to.

As the years progress your income will increase but the mortgage repayments should remain the same (roughly - and assuming no more huge interest rate hikes as seen in 2022 and so far in 2023). This should make life easier for you as you begin to stabilise on your repayments.

Your loan to value ratio will get better. 

What this means is that when you first buy a home, your loan to value ratio may be between 80% and 95% depending on the amount of deposit you had. So if you paid 5% deposit your LTV ratio is 95%. If you paid 20% deposit it will be 80%.

As you continue to repay the loan, the LTV will increase. Not only from your repayments, but also because the property is going up in value.

Consider this example:

• You purchase a home valued at $1,000,000 with a 10% deposit

• Your LTV ratio is 90%

• Over the next 5 years you make $150,000 in repayments. You now only owe $750,000 ($150,000 in repayments and your 10% deposit which is $100,000) HOWEVER…

• The home is now valued at $1,500,000. This means you now have 50% LTV ratio on your loan which means you now own a bigger percent of this asset

When it comes time to sell you will end up with a lot more money, or you can borrow against the loan to make another purchase such as a second home or a new car.

Note that if your LVR is 80% or higher, you may need to get Lenders Mortgage Insurance (LMI).

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