There are a range of factors to keep in mind when refinancing a home loan, but you might not be thinking about your loan-to-value ratio (LVR). Did you know that your LVR plays a huge role in the switching process?
If you’re looking to refinance to lock in a low-rate home loan, especially during rising rates, your LVR is key to securing a competitive rate. But if you recently bought a home and its value has dropped, you may not be in the best position to refinance.
Whatever your home loan refinance goals, you’ll want to consider your LVR first.
What is an LVR home loan?
First, it helps to understand what your home loan LVR is, so you can see how it impacts your refinance application.
Your loan-to-value ratio is the difference between the amount you borrow (the loan) and the value of the property expressed as a percentage.
For example, if you want to buy a house for $600,000 and you have a down payment of $120,000 (20% of the price of the property), you would borrow $480,000 in the form of a mortgage. The loan to value ratio in this case would be 80% because you are borrowing 80% of the value of the property.
If your LVR is over 80%, you will need to pay Lender’s Mortgage Insurance (LMI). This can run into tens of thousands of dollars depending on the value of your property.
As for refinancing and your LVR, you’ve probably been paying off your mortgage for a few years. This means that you may have reduced the amount of your loan owed and seen an increase in the value of your property over time.
Typically, 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 also have increased in value to, say, $700,000. This means that your LVR would now be 60%.
But if your property has lost value and your LVR has increased, you may need to factor the LMI payment into your refinance budget.