The average Australian spends around 14% of their monthly income on their housing.
If you want to lower that amount so you can spend more of your money enjoying your life, you can.
The best way is to get a better deal on your mortgage in the first place. To get a better mortgage, you need to lower your loan to value ratio.
Keep reading to find out more about what this is, how you can figure it out, and how to use it to get a better deal on your mortgage.
What Is a Loan to Value Ratio?
A loan to value ratio (LVR) lets a bank know how much money you’re borrowing from them compared to the value of the home. It’s always expressed as a percentage.
This is used to determine how high of a risk you are to the lending company. With a higher LVR, you’re borrowing a higher percentage of the sale price. This is riskier to the lender for a couple of reasons.
First of all, you have less equity in the home, which puts you at a higher risk of defaulting on the loan. And, if you do that, they may not be able to sell the home for enough to cover their losses.
When you have a lower LVR, you’re considered a lower-risk borrower which will reduce your interest rate.
So, let’s get into how you can calculate your loan to value ratio so you can figure out how to get the best deal whether you’re buying a home for the first time, or renewing your mortgage.
How to Calculate LVR?
To calculate your loan to value ratio, all you need to do is divide the mortgage amount by the sale price of the home.
The formula looks like this:
mortgage amount ÷ sale price = LVR
You should get a number that’s lower than zero. Use the first two numbers to the right of the decimal point as your percentage. This is your LVR.
Let’s say you’re looking at a home that’s $100,000. You have a $10,000 down payment, so you need a mortgage for $90,000.
To calculate your LVR, plug those numbers into the formula:
90,000 ÷ 100,000 = 0.90
Your LVR would then be 90%.
If this all seems a bit too complicated for you, consider using an LVR calculator instead. This is particularly helpful if you’re doing a lot of calculations since it’s much faster than using a calculator every time.
Getting the Best LVR
The lower you can get your LVR, the lower your monthly payments will be. You can then have extra spending money every month, or pay off your loan even faster. Either way, you can save money by lowering your LVR.
Most lenders consider an LVR under 80% low risk. So, you want to aim to get it under 80%. Fortunately, there are a couple of ways you can do that.
By increasing your down payment, you can decrease the amount of money you need to borrow. This is by far the easiest way to lower your LVR. You can also negotiate with the seller to get a lower price on the home.
Let’s say you’re able to double your down payment and get a lower price from the aforementioned example. Your calculation then looks like this:
75,000 ÷ 95,000 = 0.78
At 78%, you’ll be able to get a lower interest rate!
Want More Financial Tips?
Now you know how to calculate your loan to value ratio. This will help you lower your interest rate on your mortgage to save you money.
If you want more financial tips, be sure to check out our blog. There, you can find articles like the one we did recently on how to avoid debt.