2 Simplified Ways Lenders Assess Home Loans

When applying for a home loan, lenders use a few key calculations to decide how much you can borrow and how much risk they’re taking on. While there are many factors involved, two of the most important ones are serviceability and loan-to-value ratio (LVR).

1. Serviceability – Your Maximum Borrowing Capacity

Serviceability is how lenders work out the maximum amount you can afford to borrow. It’s calculated by comparing your income against your debts, living expenses and financial commitments.

Lenders also apply a buffer rate (usually around 3% above the actual interest rate) to make sure you can still afford repayments if rates increase.

2. Loan-to-Value Ratio (LVR) – Avoiding Lenders Mortgage Insurance

Your LVR compares how much you’re borrowing to the property’s value. For example, if you’re buying a $1,000,000 property and borrowing $800,000 then your LVR is 80%.

Most lenders prefer an LVR of 80% or less, because it shows you have a savings pattern and are deemed less risky. If your LVR goes above 80%, you’ll likely need to pay Lenders Mortgage Insurance (LMI), which protects the bank should you default on the loan.

Why It Matters

Understanding serviceability and LVR can help you plan your finances more effectively before applying for a loan. By improving your income-to-expense ratio and saving a larger deposit, you can boost your borrowing power and potentially avoid extra costs like LMI.

There are a few ways to avoid or reduce LMI, even with a smaller deposit:

• 85% LVR no-LMI loans: A limited number of lenders offer these options for strong applicants, letting you borrow up to 85% without paying LMI.

• Guarantor loans: A family member can use their property as security to help you avoid LMI, with some lenders exceeding 100% LVR to cover stamp duty and related costs.

• Government schemes: First home buyers may qualify for initiatives like the First Home Guarantee Scheme, where the government acts as a partial guarantor, allowing you to buy with as little as 5% deposit and no LMI.

If you’d like to find out how much you could borrow or how to structure your loan with a deposit get in touch with Complete Home Loans — your local mortgage broker in Camden & Newtown.