LVR is short for loan-to-value ratio, which is essentially a percentage representation of your home loan's size in relation to your property's value. It's calculated by dividing the borrowed amount by the property’s value and multiplying by 100 to express it as a percentage.
Your LVR is important because it often determines what home loans you can qualify for and what your interest rate will be. Borrowers with lower LVRs can generally qualify for home loans with lower interest rates.
A good LVR can also help you avoid certain home loan fees such as Lenders Mortgage Insurance (LMI). We'll show how important this can be later on.
Keeping track of your LVR when house hunting is important as it gives you a good indication of the buying power of your deposit.
What is a good loan-to-value ratio?
For many lenders in 2023, 80% or lower is generally considered to be a good LVR. To achieve that, a person’s deposit must represent at least 20% of their purchasing price.
Most lenders will not charge lenders mortgage insurance on loans with an LVR of 80% or less. Though, some may require an LVR of 60% or lower for properties they consider represent a higher risk (i.e. at risk of significant falls in value), or for borrowers who want to qualify for especially low-rate home loans.
What is a good loan to value ratio for an investment property?
Ideally, your LVR should be 80% or lower for an investment property, just as it should be for an owner-occupied one.
A low LVR is particularly important for investment home loans since they tend to have slightly higher interest rates. A 95% LVR, for example, could cost more on investment properties, as you’re likely to be paying a higher interest rate on a greater loan amount.
If you’re using the equity in your home to buy an investment property, most lenders will often require you to have at least 20% of the property’s value in equity.
How to calculate your LVR
Lenders typically calculate your LVR by dividing the loan amount by the property’s value and multiplying it by 100.
For example, if you were looking at a property valued at $450,000 (not its price, its value) and had a $90,000 deposit, you would need to borrow $360,000 from a lender. By dividing $360,000 (the loan amount) by $450,000 (the valuation of the property), we get 0.8 which, multiplied by 100, means that your loan-to-value ratio for this hypothetical loan is 80%.
|
Property value |
Deposit |
Loan amount |
LVR |
|
$450,000 |
$45,000 |
$405,000 |
90% |
|
$450,000 |
$67,500 |
$382,500 |
85% |
|
$450,000 |
$90,000 |
$360,000 |
80% |
|
$450,000 |
$112,500 |
$337,500 |
75% |
|
$450,000 |
$135,000 |
$315,000 |
70% |
|
$450,000 |
$175,000 |
$275,000 |
60% |
You can use this formula to work out your own potential LVR. You can also use the Savings.com.au Home Loan Borrowing Power Calculator to find out the maximum you might be able to borrow, which can help you get your required deposit size right.
How can LVR affect your interest rate?
LVR can impact the interest rate on your home loan as many lenders apply a lower interest rate to borrowers with lower LVRs. Why? Because these borrowers represent less risk to lenders. A low LVR means the property should be worth considerably more than the debt that’s owed against it. So, if the borrower were to default on the loan, the lender will have a good chance of recovering their debt by repossessing the borrower’s property and selling it.
Variable home loans with 95% LVR
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.49% p.a. | 6.57% p.a. | $2,526 | Principal & Interest | Variable | $0 | $995 | 95% | |||||||||||
7.29% p.a. | 7.29% p.a. | $2,740 | Principal & Interest | Variable | $0 | $0 | 95% | |||||||||||
7.84% p.a. | 7.86% p.a. | $2,891 | Principal & Interest | Variable | $0 | $200 | 95% |
How can LVR affect your LMI cost?
Along with potentially having a higher interest rate, borrowers with a higher LVR can also be hit with Lender’s Mortgage Insurance, or LMI. LMI acts as something of a safety net to the lender should you be unable to make your monthly loan payments - it is not insurance for the borrower. It can vary in price depending on the lender and what LVR percentage you have, but can leave you tens of thousands of dollars out of pocket if you aren’t careful.
The lending industry average LVR where LMI is applied is from approximately 80% and higher. According to the Savings.com.au LMI estimator, if you have an LVR of 90% on a $400,000 loan for up to 30 years, you could be hit with an LMI premium of more than $7,200. On a loan twice that size it would cost more than $18,000.
Here’s a quick look at what a first home buyer can expect to pay for LMI based on varying house prices and LVRs:
|
Estimated property value |
95% LVR LMI cost |
90% LVR LMI cost |
85% LVR LMI cost |
|
$200,000 |
$6,137 |
$2,574 |
$1,299 |
|
$400,000 |
$15,428 |
$6,552 |
$3,390 |
|
$600,000 |
$31,008 |
$9,828 |
$5,100 |
|
$800,000 |
$41,344 |
$14,400 |
$6,800 |
Source: Savings.com.au LMI estimator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years.
So if you want to avoid LMI and put yourself in a good position to qualify for lower interest rates, you could aim to have a lower LVR by buying a property in a lower price bracket, or by waiting longer to save up a bigger deposit. But this isn’t practical for everyone.
Case studyTim was looking at houses for $450,000 and had $22,500 in his savings. If he had calculated his loan-to-value ratio before applying for a loan, he would have discovered that he had an LVR of 95%. Because of this high ratio, the lender thought he was too high of a risk and rejected his application.
Tim decided against buying the house and saved up until he had $90,000 in his savings – which achieved an LVR of 80%. When he reapplied for the loan, it was approved by the lender and he didn’t have to pay any LMI.
|
Lender valuation vs. purchase price
Often, the lender’s official valuation of the property (from when they send someone out to conduct an independent valuation) will differ from the actual sale price for it. This can affect your LVR, and presents two scenarios:
1. If a valuation is less than the purchase price
If a lender finds a property is worth less than its purchase price, a borrower's LVR will increase, as they're borrowing a larger portion of their property's value.
For example, if the purchase price of the house is $600,000, and you’re borrowing $450,000, then you estimate your LVR to be 75% - enough to avoid LMI. But when the lender does its valuation, it deems the house to be worth $530,000, which would set your LVR to just under 85%.
In this case, the lender might:
- Go ahead with the loan, but make you pay LMI; or
- Refuse to lend to you, since they might have criteria to only lend to people with an 80% LVR or below.
It can sometimes be beneficial to get an independent valuation done to avoid this situation.
2. If a valuation is higher than the purchase price
Alternatively, if the lender values the property and finds it's worth more than the purchase price, your LVR will decrease, as you’re borrowing a smaller amount of the overall value.
This is less likely to happen though as lenders tend to be more conservative with their valuations as they need to know what the property is worth in the event you can’t meet your repayments and they have to sell it.
Do you always need a lower LVR?
There are good reasons why you’d want an LVR lower than 80%. As discussed above, a 20% deposit or greater can help you secure a lower interest rate and more favourable lending conditions, which in turn can seriously reduce your monthly interest repayments. Plus, you can potentially save yourself thousands in LMI premiums.
But sometimes an 80% LVR might not be practical. It can sometimes be worth paying a lower deposit and copping the LMI penalty to ensure you buy into the market quickly. Saving for a house deposit can take a long time and over this time the value of the house you’ve got your eye on can increase significantly. A $25,000 LMI premium could look like pocket change compared to a $100,000+ increase in the capital value of the house, and you’d be kicking yourself if you missed out on this opportunity because you wanted to wait for a higher deposit.
If some recent house price gains are anything to go by, the capital gains on your property could far exceed any savings you could make by not paying lenders mortgage insurance. So sometimes it’s worth just jumping in with a 5-15% deposit. Just ensure your interest rate isn’t too much higher: an interest rate that’s 100 basis points higher can result in tens (if not hundreds) of thousands more being paid in interest over the life of the loan.
The following calculators can help you reach a decision on whether you need a 20% deposit or not:
100% LVR home loan: the maximum loan-to-value ratio
It’s possible to get a loan without paying a deposit on your home – (i.e an LVR of 100% or more) – but not by yourself. You can be approved for a home loan with an LVR of 100% or even as high as 110% (e.g. if you’re consolidating other debts into the home loan) through the use of a guarantor, which is someone (usually a parent) who agrees to take responsibility for repaying the home loan should you fail to make the repayments.
This is quite risky on behalf of the guarantor, so it’s not a decision that can be made lightly. But by making extra repayments on your mortgage or having the value of your property increase, the guarantor may become unnecessary.
Guarantor home loans are popular among first home buyers or people with lower incomes who struggle to afford a high enough deposit.
Savings.com.au’s two cents
Your LVR is indicative of how much of the property’s value you have to repay to the lender. A higher LVR can cost you more over the life of the loan because:
- You may have a higher interest rate
- You may have to pay LMI
- You’re borrowing more for the property
But as discussed, it’s not always practical or economical for someone to hold off buying property until they have an LVR of at least 80%. Mainly because property prices may rise significantly over the time it takes to save up a 20% deposit. So in general, aim to have an LVR of at least 80%, but consider whether you can afford to wait and think about jumping in when you can.
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| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
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Photo via Tierra Mallorca on Unsplash
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