The Number Your Bank Looks at Before You Refinance
When homeowners think about refinancing, the interest rate often gets the most attention.
However, another number can have a major influence on the options a lender may offer. It is called the loan-to-value ratio, or LVR.
Your LVR compares the amount you owe with the value of the property securing your loan. It can affect how lenders assess risk, whether Lenders Mortgage Insurance may apply, and which refinancing options may be available.
For homeowners and property investors across Adelaide, including Unley, Burnside, Norwood, Glenelg, Linden Park and surrounding areas, understanding your LVR can be useful before reviewing an existing home loan.
What Is Loan to Value Ratio?
LVR shows the size of your loan as a percentage of the property's value.
For example, imagine your home is valued at $800,000 and you owe $560,000.
Your LVR would be 70 per cent.
As you repay your loan, your LVR may fall. It can also change when the value of your property rises or falls.
This means the LVR you had when you purchased your home may be different several years later.
Why Does LVR Matter to Lenders?
Lenders use LVR as one factor when assessing a home loan application.
A higher LVR means the loan represents a larger percentage of the property's value. A lower LVR generally means you have more equity in the property.
Your LVR can affect lending options, pricing and whether Lenders Mortgage Insurance may apply. However, policies vary between lenders.
Lenders Mortgage Insurance generally protects the lender if a borrower cannot meet their loan obligations. It does not provide insurance protection to the borrower.
LVR is also only one part of a lending assessment. Lenders may review your income, living expenses, existing debts, credit history and ability to service the proposed loan.
How Property Valuations Can Change Your LVR
Your estimate of your property's value may not be the figure a lender uses.
When refinancing, a lender may arrange a valuation of your property. The result can affect the LVR used to assess your application.
For example, imagine you owe $600,000.
If the property is valued at $800,000, the LVR would be 75 per cent.
If the valuation is $750,000, the LVR would increase to 80 per cent.
That difference may affect the refinancing options available to you.
Property values can move in either direction. For this reason, homeowners should not assume they have a certain amount of equity based only on nearby sales or online property estimates.
How Equity May Support Different Financial Goals
LVR is closely connected with home equity.
Equity is generally the difference between your property's value and the amount you owe against it. However, your total equity is not necessarily the amount you can access through additional borrowing.
Accessing equity is not limited to property investment. Depending on your circumstances, loan purpose and lender requirements, you may explore available equity when refinancing for purposes such as renovations or contributing towards an investment property purchase.
Ignite Financial Solutions specifically offers refinancing, renovation finance, investment property lending and equity-based home upgrade options, making this broader discussion relevant to its clients.
Accessing equity involves additional borrowing. This can increase your loan balance, repayments and total interest costs.
Any application remains subject to property valuation, serviceability, credit assessment, lender criteria and approval.
Why It Can Be Worth Reviewing Your Home Loan
Interest rates, property values and lender policies can change over time. Your own circumstances may also change as your income, debts, property value and loan balance change.
This means the loan you took out several years ago may not reflect the lending options available today.
A refinancing review should consider more than the advertised interest rate. It may also consider the comparison rate, fees, loan features, remaining loan term and switching costs.
Loan features can also matter. For example, an offset account or redraw facility may influence how you manage your home loan.
The overall costs and effects of refinancing should be considered before deciding whether to change loans.
Could a Lower LVR Affect Your Refinancing Options?
If you have been repaying your home loan for several years, your loan balance may have fallen.
At the same time, your property's value may have changed.
Together, these factors could result in a different LVR from when you first took out the loan.
A lower LVR does not automatically mean you will receive a lower interest rate, lower repayments or loan approval. However, understanding your current LVR can provide a useful starting point when comparing lending options.
It is also important to consider the costs of changing loans. Depending on the lender and loan, these could include discharge fees, application costs, valuation fees and other charges.
What Should You Review Before Refinancing?
Before refinancing, consider reviewing:
Your current loan balance
Your property's estimated value
Your approximate LVR
Your current interest rate and comparison rate
Loan features such as offset or redraw
Your income, expenses and existing debts
Refinancing and discharge costs
The remaining term of your current loan
Your reasons for refinancing
Your future borrowing plans
Looking at the full picture can help you understand the potential costs and effects of changing your home loan.
Know Your LVR Before Making Your Next Move
Your LVR may seem like a simple percentage, but it can play an important role when refinancing.
Changes in your property value or loan balance may mean your LVR today is different from when you first borrowed.
Understanding your current position may help when reviewing refinancing, available equity and other lending options.
If you are considering refinancing, accessing equity or reviewing your current home loan, Ignite Financial Solutions can help you compare lending options based on your needs, financial circumstances and applicable lender criteria.
Call Ignite Financial Solutions on 08 8379 3636 or email [email protected] to discuss your current home loan, LVR and refinancing options.
