Potential property buyers are faced with increasing confusion, with potentially misleading loan-to-value ratios (LVRs) being advertised on home loans.
LVR is the proportion of money home buyers can borrow compared to the value of the property.
The confusion is coming from lenders advertising their home loans with two different LVRs, a ‘maximum LVR’ and a ‘maximum insured LVR’.
So what’s the difference between the two?
Maximum insured LVR is regarding how much you can borrow including the cost of capitalising lenders’ mortgage insurance into the loan, which is usually charged once borrowers borrow more than 80 per cent of the value of the property.
Conversely, maximum LVR does not include LMI, so that means you can add the cost of LMI onto the loan, on top of the minimum deposit (or maximum LVR).
For example, if the maximum insured LVR is 90 per cent and you want to buy a property for $300,000 and you have a $30,000 deposit, then your loan is $270,000 and the LMI cost will be about $4000.
However, you won’t be able to capitalise the $4000 cost into this loan because the maximum it will allow you to borrow is 90 per cent LVR, including the LMI.
If the loan had the other type of LVR, a maximum LVR of 90 per cent, you can add LMI on top of the loan, even with a 10 per cent deposit, which means you could borrow $274,000 with a $30,000 deposit.
When lenders don’t disclose upfront that the maximum LVR includes LMI, borrowers can get left in the dark as to how much deposit they really need and how much money they can actually borrow.
For borrowers who are planning to borrow more than 80 per cent of the property value, the easiest way to avoid the confusion is to assume all home loans show the maximum insured LVR and include the cost of capitalising LMI into the loan when determining how much deposit is needed.