There are a range of factors to keep in mind when refinancing a home loan, but you may not be thinking about your loan-to-value ratio (LVR). Did you know your LVR plays a considerable role in the switching process?
If you’re looking to refinance to lock in a lower-rate home loan, particularly in a time of rising rates, your LVR is a key component in nabbing a competitive rate. But if you’ve recently purchased a home and its value has fallen, you may not be in the greatest position to refinance
Whatever your home loan refinancing goals are, you’ll want to consider your LVR first.
What is a home loan LVR?
Firstly, it’s worth understanding what your home loan LVR is, so you can see how it impacts your refinancing application
Your loan-to-value ratio is the difference between the amount you’re borrowing (the loan) to the value of the property expressed as a percentage.
For example, if you want to buy a home that is $600,000 and you have a $120,000 deposit (20% of the property price), you would be borrowing $480,000 as a mortgage. The loan-to-value ratio in this instance would be 80%, as you’re borrowing 80% of the value of the property.
If your LVR is above 80%, you’ll need to pay Lender’s Mortgage Insurance (LMI). This can climb into the tens of thousands of dollars range depending on the value of your property.
When it comes to refinancing and your LVR, you’ve likely been repaying your mortgage for some years. This means you may have reduced your loan amount owing, as well as seen an increase in the value of your property over time.
Generally, when a homeowner chooses to refinance it’s because their LVR is now smaller. For example, after 5 years on the same home loan, you may have reduced your loan amount to, say, $420,000. The property could have also increased in value to, say, $700,000. This means your LVR would now be 60%.
But if your property has fallen in value and your LVR has risen, you may need to factor in paying LMI into your refinancing budget.