What is an LVR? How does it affect your interest rate?

WHAT IS AN LVR?     HOW DOES IT AFFECT YOUR INTEREST RATE?

When searching for home loans online, you may come across different terminologies related to interest rates.   The most common terms are interest rate and comparison rate percentages.   The interest rate excludes fees and charges, while the comparison rate includes the interest rate and the hidden costs you will have to pay. To determine the actual cost of a loan, always look at the comparison rate.

Financial institutions may advertise multiple interest rates with reference to Loan to Value Ratio (LVR) percentages.

For instance, ABC Bank may offer 6.29% [LVR 90%], 5.99% [LVR 80%], or 5.19% [LVR 60%]. The interest rate offered by the institution is reduced according to your LVR.

LVR refers to the equity in the property or the ratio of the loan to the asset value. To calculate your LVR you will need to know the current value of the property as well as the outstanding loan payable.   For example, if your property is worth $500,000 and the loan payable is $400,000, your LVR would be 80% ($400,000 divided by $500,000 x 100).

Financial institutions refer to the LVR to assess loan risk. The lower the LVR, the greater the bargaining power you will have to request a reduced interest rate.

It is important to note that your LVR will change during the loan term, lowering your risk as a client. If your LVR is below 60%, you will be in a strong position to request an interest rate reduction.

Take the time today to calculate your LVR to determine your bargaining power for an interest rate reduction. Even if your LVR exceeds 60%, a five-minute telephone call could save you money in a reduced interest rate percentage.

Article courtesy of PPM Group