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Welcome to the finance update for the week ending 1 April, 2023.
New analysis released during the week has revealed that, in the three months to December 2022, 30+ day mortgage arrears rose to 0.82 per cent – 11 bps more than the prior quarter – as the reality of increased mortgage repayments takes hold. It is expected to increase further in the March quarter but at a slower rate given that extra spending around Christmas often inflates the December quarter figures somewhat.
In this week’s newsletter, we look at Loan to Value (LVR) ratios and the impact they have on interest rates. Looking at the table included with this explanation, it’s quite obvious which of the Big 4 banks has little appetite for low equity borrowers – they also happen to be the Big 4 with the best rate for higher equity borrowers.
What LVR (Loan to Value Ratio)?
The Loan-to-Value Ratio (LVR) is the amount being borrowed, represented as a percentage of the value of the property being purchased. The bigger the deposit*, the lower the LVR will be.
*It’s important to remember that upfront costs such as conveyancing and stamp duty aren’t included in the deposit
How To calculate the LVR?
The Loan-to-Value Ratio is calculated by dividing the loan amount by the purchase price or valuation of the property you’re buying, expressed as a percentage.
For example, let’s say that you’d like to borrow $450,000 and the property price is $600,000.
The LVR of the home loan would be calculated like this:
($450 000 loan ÷ $600 000 property value) x 100 = 75% LVR
Impact of the LVR on a home loan
Lenders place a large emphasis on the LVR when assessing a loan application, as the lower the LVR, the lower the risk to the bank.
Consequently, most lenders offer a lower interest rate for borrowers with lower LVR’s.
As you can see from the table below, the difference between a purchaser with a deposit of 40% and a purchaser with a deposit of only 10% can be significant.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
Standard Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
