In the world of home lending, there are two acronyms which are used frequently by banks, brokers and the media: LVR and LMI. It's important to understand what each means,  the relationship between the two and the resultant impact on home loans and lending. 

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LVR is Loan to Value Ratio.

 

It is the loan amount divided by the property value expressed as a percentage. For example, a loan of $300,000 secured against a home valued at $600,000 has an LVR of 50%.

 

For this same $600,000 home, if the loan amount was $480,000, the LVR would be 80%.

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The LVR is used by the banks to ascertain the risk of a loan.

 

In simple terms, if a loan amount has an LVR of 80% or less the banks will deem this to be a less risky loan than those loans with an LVR greater than 80%. And, further, the closer the LVR is to 100%, these loans are understandably considered the riskiest of all.

 

To circumvent the risk by the banks of lending over an LVR of 80% and protect the funds they have leant to the borrower, they charge LMI to the borrower.  

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LMI is Lender’s Mortgage Insurance, which is an insurance policy to protect the bank from financial loss in the event that the borrower can’t afford to keep up their home loan repayments.

 

It is paid by you, the borrower, at the time the loan is set up.

 

The impact of the relationship between LMI and LVR is not just limited to you paying an insurance premium, but it can reduce how much you can borrow and the interest rate that you end up paying.