Your loan-to-value ratio (LVR) is the size of your home loan as a percentage of the property’s value. It’s one of the first numbers a lender looks at, because it shows how much of the property is funded by the lender and how much by you.
The lower your LVR, the more of the property you own outright, and the less risk the lender is taking on.
How to work out your LVR
The formula is simple:
LVR = loan amount ÷ property value × 100
Here’s an illustrative example using round numbers. Say you’re buying a home for $800,000 and you have a deposit of $160,000 after allowing for your buying costs.
- Loan amount: $800,000 less $160,000 = $640,000
- LVR: $640,000 ÷ $800,000 × 100 = 80%
If you had an $80,000 deposit instead, you’d borrow $720,000, and your LVR would be 90%.
The same idea applies if you already own a home. If your property is worth $1,000,000 and you owe $500,000, your LVR is 50%.
| Property value | Loan amount | LVR |
|---|---|---|
| $800,000 | $560,000 | 70% |
| $800,000 | $640,000 | 80% |
| $800,000 | $720,000 | 90% |
| $800,000 | $760,000 | 95% |
These figures are illustrative only.
Why LVR matters
Lenders mortgage insurance. LMI usually applies when your LVR is above 80%. The higher your LVR, the higher the premium tends to be. Keeping your LVR at or below 80% usually means avoiding LMI altogether, unless you’re using a scheme or waiver that removes it.
Pricing. Many lenders price their loans in LVR bands. Borrowers with lower LVRs are often offered sharper rates, because the loan is seen as lower risk. Even moving from just above a band to just below it can make a difference.
Approval and loan options. Lenders set a maximum LVR for different loan types and borrowers. Some products are only available below a certain LVR. Investment loans, interest-only loans and loans for some property types may have stricter limits. A lower LVR gives you more choice.
Your safety buffer. A lower LVR also gives you more equity to absorb a fall in property values, and more flexibility if you want to refinance or access equity later.
A note from Jenny If you’re sitting just above an LVR threshold, it’s worth knowing before you apply. Sometimes a small change, like adding a little more to the deposit, can make a noticeable difference to the cost of the loan.
How valuation affects your LVR
Lenders don’t simply use the price you agree to pay. They arrange their own valuation of the property and, for a purchase, generally use the lower of the valuation and the purchase price.
That matters if the valuation comes in under the price. Using illustrative numbers again:
- You agree to buy a home for $800,000 and plan to borrow $640,000, an 80% LVR.
- The lender’s valuer values the property at $760,000.
- Your LVR is now worked out on $760,000: $640,000 ÷ $760,000 = about 84%.
That small gap could mean you now need to pay LMI, or find extra funds to bring your LVR back down to 80%. To borrow at 80% of $760,000, your loan would be $608,000, so you’d need an extra $32,000 towards the purchase.
This is called a valuation shortfall. It can happen in a rising market, at auction, or where a property is unusual and hard to compare. Getting pre-approval and understanding how your lender values property can help you plan for it.
How LVR changes over time
Your LVR isn’t fixed. It falls as you repay the loan and if your property rises in value. It can rise if property values fall, or if you borrow more against the home.
This is worth keeping in mind when you refinance. The new lender will order a fresh valuation, and your LVR at that point affects whether you pay LMI and what pricing you’re offered. If you capitalised LMI when you bought, remember that the premium was added to your loan balance, which nudged your LVR up slightly from day one.
Lowering your LVR
The main ways to bring your LVR down are:
- saving a bigger deposit before you buy
- making extra repayments, which reduce your loan balance
- using a family guarantor, where a lender accepts this
- waiting for your equity to grow before refinancing or borrowing more.
Knowing your LVR, and where the key thresholds sit, puts you in a much stronger position when you choose a loan.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.