WTF is…. LVR & DTI?

If you’re dealing with lenders, getting your head around their ‘bank speak’ can be a little tricky.  In fact, it can sound like a whooooole other language. So because we love to make things easy, we decided it might be helpful if we did a little ‘banksplaining’ for you.

LVR and DTI are two abbreviations (or acronyms) that you’ll probably come across in the really really fine print at the end of a bank ad about home loans. One has been around for a while, the other has become used a little more recently. 

But both are important and are referring to ratios that are used as part of home loan assessments. They calculate different types of gearing of a borrower. So, here’s the lowdown:

LVR: Loan to Value Ratio.

In simple terms, the loan-to-value ratio is the loan amount as a percentage of the value of the property.
It measures how much debt is against a property, in a nice little percentage. The higher the loan amount, the higher the ratio. 

For example, let’s say your loan is $450,000 and the property value is $600,000. That means your LVR is 75% (This is calculated like this: $450,000 divided by $600,000, then multiplied by 100).

The ratio also helps to define how much of the property you own - which is your equity. The difference between the LVR percentage and 100% is the equity you have. So in the above example, the equity is 25%.

The LVR is used by lenders as one measure of the risk that lenders use when considering loan applications. The higher the LVR, the higher the risk and this then translates into higher interest rates, particularly when the LVR is above 80%.

DTI: Debt To Income.

Rather simply,  the debt to income ratio is a number that shows how much total debt you have, as a multiple of your income. The higher the number, the more debt that you have when compared to your income.

The income is measured before tax & the debt includes loans like Mortgages, Personal loans, Credit cards, car loans etc

For example, if you have a home loan for $550,000 plus a $20,000 Credit card and you & your partner earn $175,000 together (before tax), then you have a DTI of 3.25. (It’s calculated like this: $550,000 plus $20,000 then divided by $175,000).

The lower the number the better, with generally anything under 3 considered great; between 3 - 5 is good; 5-6 is starting to get a bit up there; and above 6 isn’t so crash hot.

Lenders use DTI as another measure of the risk when considering a loan application, as it gives an indication of how much a borrower is leveraging their income. Once it goes beyond 6, lenders start to think twice.

Summary

Lenders often use both LVR & DTI in unison, when they’re assessing loan applications, because it gives them two numbers that quickly help them consider the risk of the transaction. All lenders have different levels of risk that they want to take on for clients, which is totally cool, because it gives us options for you. 

Often lenders change how much risk they want to take and can use LVR & DTI to help them increase or decrease the risk they want at any period.

If you’d like to know more, book an appointment or contact us

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