What Is Loan-to-Value Ratio (LVR)?

LVR (Loan To Value Ratio) which is expressed as a percentage helps banks assess the default risk of your home loan application.

How Do I Calculate LVR

To calculate your LVR, divide your total loan amount by the property’s lender-assessed valuation or purchase price, then multiply the result by 100. For example, borrowing $400,000 for a $500,000 property results in an 80% LVR.

The LVR Calculation Formula:

LVR = (Loan Amount ÷ Property Value) × 100

Example Calculation: Let’s say you want to purchase a property valued at $500,000 and you have saved a $100,000 deposit.

You need to borrow $400,000.

($400,000 ÷ $500,000) = 0.8

0.8 × 100 = 80% LVR

Deposit Size vs. LVR Scenarios

Below is a comparative table showing how different deposit sizes impact your final LVR and whether LMI is required on a $600,000 home.

Why Does Your LVR Matter To Lenders?

Your LVR matters to lenders because it directly indicates the financial risk of your home loan application. A lower LVR means you have more equity in the property, which reduces the lender’s risk and qualifies you for greater borrowing power.

The 80% LVR Rule and Lenders Mortgage Insurance (LMI)

For most lenders, an LVR above 80% crosses into high-risk territory. If your LVR is 80.01% or higher, banks will mandate Lenders Mortgage Insurance (LMI). LMI is a one-off premium that protects the lender (not you) if you default on your mortgage.

Depending on your loan amount, LMI can add thousands of dollars to your overall debt. We do, however, have access to select lenders that offer no-LMI home loans for specific professions.

LVR Interest Rate Tiers

Modern borrowers should know that banks do not offer a flat interest rate for everyone. Instead, they price home loans in interest rate tiers based on your LVR.

<60% LVR: You are considered a very low-risk borrower and will typically be offered the bank’s most heavily discounted rates.

60% – 70% LVR: You will receive highly competitive rates, often slightly above the lowest tier.

70% – 80% LVR: You will receive standard market rates.

>80% LVR: You will face higher interest rates and the additional cost of LMI.

How To Lower Your LVR?

If you want to secure better interest rates or avoid LMI, you need to reduce your Loan-to-Value ratio. Here is actionable advice on how to lower your LVR before applying for a home loan:

• Save a bigger deposit: The larger your initial down payment, the less money you need to borrow, immediately dropping your LVR.
• Buy a cheaper property: Adjusting your property search to a more affordable suburb increases the percentage weight of your existing deposit.
• Pay down existing debt: Reducing personal loans or credit cards improves your overall serviceability and cash flow.
• Use a Guarantor: Leveraging a family member’s property as additional security can drastically reduce your LVR.

Can You Borrow at 100% LVR?

Yes, you can borrow at 100% LVR if you use a guarantor home loan. A family member uses the equity in their own property as supplementary security for your mortgage.

Because the bank now has two properties securing the loan, your functional LVR drops below 80%. This entirely removes the need for a cash deposit and waives the LMI requirement.

Once your property value increases or you pay down enough principal, the guarantor can be released.

Do Lenders Use the Purchase Price or Property Valuation?

Lenders will always use the lower of the purchase price or the bank valuation to calculate your LVR. This protects the bank against market fluctuations and ensures they are not lending more than the property is worth.

Dealing With A Valuation Shortfall

A valuation shortfall happens when the bank’s valuer determines the property is worth less than what you agreed to pay for it.

Off-the-plan purchases: This is common for new builds, as market conditions can shift between signing the contract and final settlement 12-24 months later.

Favorable purchases: If you buy a property from a family member at a discount, the bank may calculate the LVR using the higher actual bank valuation, provided the contract is over 12 months old.

Please note that a bank valuer’s estimate is often conservative. Our mortgage brokers can order upfront valuations with multiple lenders to help you maximize your borrowing power.

How Does LVR Affect Refinancing?

When refinancing, your LVR is calculated using your current outstanding loan balance divided by a brand-new bank valuation of your property. The original purchase price is no longer relevant.

If you have owned the home for several years, paid down your principal debt, or completed renovations, your property’s value has likely increased. This creates a much lower LVR, which allows you to unlock usable equity for investments and negotiate cheaper interest rate tiers with a new lender.

Discuss Your Home Loan LVR Options Today

Your LVR is a critical factor in your home ownership journey. Whether you are trying to avoid LMI, utilize a guarantor, or refinance to a better rate, our award-winning mortgage brokers are here to help.

Complete our free online assessment form or call us on 1300 889 743 for expert guidance.