What Is LVR and Why Does It Matter for Your Home Loan?

Loan-to-value ratio, almost always shortened to LVR, is one of the most important numbers in the Australian home lending market. It appears in almost every conversation about home loans, yet many buyers are unclear on exactly what it means, how it is calculated and why lenders care about it so much.

Understanding LVR before you apply will help you plan your deposit, anticipate your borrowing costs and avoid surprises in the application process.

How LVR Is Calculated

LVR is the ratio of your loan amount to the value of the property, expressed as a percentage.

The formula is:

Loan amount divided by property value, multiplied by 100.

If you are buying a $750,000 property and borrowing $600,000, your LVR is 80 per cent. If you borrow $675,000 on the same property, your LVR is 90 per cent.

The property value used in the LVR calculation is the lower of the purchase price and the bank's independent valuation. If the bank values the property at $720,000 but you are paying $750,000, the lender will calculate LVR based on $720,000, which means you effectively need a larger deposit than you planned.

Why LVR Matters to Lenders

LVR is the lender's single clearest measure of how much skin in the game you have as a borrower. A lower LVR means you have contributed more of your own money and the lender has a larger equity buffer if things go wrong.

If you default and the property is sold, the lender needs to recover the outstanding loan. At 60 per cent LVR, the property would need to fall 40 per cent in value before the lender's position is threatened. At 95 per cent LVR, a fall of just five per cent in the property's value means the lender could be undersecured.

This is why lenders price risk based on LVR and impose different conditions at different thresholds.

LVR Thresholds That Matter

Several important thresholds will affect your borrowing costs and options.

80 Per Cent LVR

This is the most significant threshold in Australian home lending. Below 80 per cent LVR, most standard lenders do not require Lenders Mortgage Insurance. Above 80 per cent, LMI applies on standard loans.

Saving to an 80 per cent LVR, meaning a 20 per cent deposit, is the goal most buyers are working toward. It eliminates LMI, generally unlocks more competitive rates and signals to lenders that you are a lower-risk borrower.

90 Per Cent LVR

At 90 per cent LVR, LMI applies on standard loans. The premium is meaningful but not as large as at 95 per cent. Some government schemes and professional waivers operate at this threshold.

95 Per Cent LVR

A 95 per cent LVR means a five per cent deposit. This is the minimum accepted by most standard lenders, and it triggers the highest LMI premiums. The First Home Guarantee operates at this LVR level, replacing the need for LMI with a government-backed guarantee.

70 Per Cent LVR

Some specialist loan products, including SMSF loans, certain non-bank lender products and some bridging loan structures, have maximum LVRs of 70 per cent. Borrowing above this level is not available under these products.

How LVR Affects Your Interest Rate

Beyond LMI, LVR can affect the interest rate you are offered. Most lenders tier their pricing by LVR, with borrowers at lower LVRs qualifying for sharper rates.

A borrower at 60 per cent LVR typically pays a lower rate than one at 90 per cent LVR, even from the same lender on the same product. The difference can be 0.2 to 0.5 per cent, which over a 30-year loan translates to significant interest savings.

This tiered pricing is another financial reason to build as large a deposit as possible before purchasing, not just to avoid LMI.

LVR and Your Equity Position

Your LVR is not fixed at purchase. It changes over time in response to two factors: your loan repayments reducing the principal balance, and changes in the property's value.

As you make principal and interest repayments, your outstanding balance decreases. At the same time, if your property value increases, the denominator in the LVR calculation increases too. Both effects reduce your LVR over time.

This declining LVR is the mechanism by which homeowners build equity. A property purchased at 90 per cent LVR may be at 65 per cent LVR after five to ten years of repayments combined with modest capital growth.

That growing equity has practical value. It can be used to have a guarantor released from the loan, to access a home equity loan for renovations or investment, to refinance to a better rate or to fund the purchase of an investment property.

LVR and Investment Properties

LVR requirements for investment properties tend to be slightly more restrictive than for owner-occupier loans. Many lenders cap investment LVRs at 80 per cent without LMI, and some have specific restrictions on property types.

High-density inner-city apartments in certain postcodes are sometimes subject to lower maximum LVRs of 70 per cent or lower, because lenders regard these markets as higher risk. If you are buying an investment apartment in a large complex, check the LVR restrictions with your lender or broker before assuming a standard 80 per cent LVR applies.

Checking Your LVR Before You Apply

Before you apply for a home loan, it is worth working out your LVR precisely so you know exactly where you stand relative to the key thresholds.

Take your intended loan amount (purchase price minus deposit, minus any grants or gifted funds that are genuine deposit contributions). Divide by the purchase price. Multiply by 100. If the result is above 80, LMI will apply on a standard loan. If it is above 95, most standard lenders will not proceed.

Use the Purchasing Power and Borrowing Capacity calculators at HomeLoanTools.com.au to model how your deposit size affects your LVR, your LMI exposure and your borrowing potential.