In the past few months, you may have heard some banks announcing plans to tighten lending to property investors – and specifically, to cap their mortgage products at a particular LVR.
So what does this actually mean and how does it affect homebuyers?
What is LVR?
LVR stands for loan-to-value (or sometimes loan-to-valuation) ratio. It’s a percentage figure that compares how much a lender is willing to loan you against the total value of the asset you plan to buy.
It often tends to pop up in the context of home loans, where the asset in question is property.
Say you’ve saved up $40,000 for a home loan deposit, and you come across an apartment you like that’s advertised for sale at $400,000. In order to buy this property you’ll need to take out a mortgage of $360,000 (excluding all other costs including stamp duty).
In this case, and assuming the lender has also valued the property at $400,000, the LVR would be $360,000 ÷ $400,000 (x100) = 90%.
(Note that a lender will value a property and decide how much it is prepared to loan you based on its own valuation, not the advertised purchase price, which may be different.)
LVR and lenders’ mortgage insurance
In Australia, some lenders will currently loan up to 95% of a property’s value as the LVR. But while this can mean you’re able to buy a property sooner, since you don’t have to save as long for your deposit, having a smaller deposit may mean you’re charged lenders’ mortgage insurance (LMI) or a low deposit premium.
As a general rule, if you can save 20% or more of your property’s value as a deposit—in other words, if the LVR is capped at 80%—you can often avoid these extra costs.
It’s also worth remembering the more you borrow up front, the more you’ll pay back in interest over time.
Why are some lenders tightening their LVR loans?
The Australian Prudential Regulation Authority (APRA) is the regulator that oversees banks, credit unions, building societies and other authorised deposit-taking institutions (ADIs).
It says high LVR loans are an example of “higher risk mortgage lending”, and that “in the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth”, LVRs need to be closely watched.
While APRA's key focus is to ensure the stability of Australia's financial system—and subsequently that institutions like banks limit the portion of their portfolios in these “higher risk” loans—the Reserve Bank of Australia (RBA) is hoping this supervision will also help to contain any unsustainable property price growth.
Although APRA has not implemented official caps on any specific types of loans, in December 2014 it flagged to ADIs it would be paying "particular attention" to high LVR lending.
It also suggested it would keep a close eye on growth in lending to investors, who have been at least partly credited with driving demand and house price increases in cities such as Sydney.
LVR and postcode restrictions
Some lenders may also cap the LVR on home loans according to the suburb in which a property is located. This is because lenders may impose stricter lending policies for areas or postcodes they consider higher risk – for example, where the property market may not be considered “active”.
Make sure you check this carefully with your lender before you apply for your home loan so you know exactly how much you need to save before proceeding with your application.