What is an LVR and how does your loan-to-value ratio affect what you pay over the life of your home loan? Why you should try to raise a large deposit.

## What is an LVR?

LVR stands for loan-to-value ratio or loan-to-valuation ratio, and it means the percentage of a property’s purchase price that a lender will let you borrow. In practical terms, the LVR tells you how big of a deposit you will need to raise before applying for a loan on the property.

The LVR is calculated based on the total value of the investment, the loan amount, and the maximum lending risk the lender is willing to face.

LVRs exist because banks and other financial lending institutions have to follow strict legislative requirements to protect borrowers from financial hardship and to protect themselves from risk. First, they can only lend as much as they reasonably expect someone can afford to repay. Also, they can’t lend you more than the value of the home because if the loan goes bad they need to be able to sell the house to get their money back.

## How does an LVR affect how much you can borrow?

#### How much deposit …

Asset purchase price Maximum LVR Deposit required
\$350,000 95% \$17,500
\$350,000 90% \$35,000
\$350,000 80% \$70,000
\$350,000 70% \$105,000
\$350,000 60% \$140,000

It’s important to consider how much a financial lending institution may actually be willing to lend you before you start applying for home loans. If your application is rejected, this may affect your credit score negatively.

The Canstar Borrowing Power Calculator can help you out here. Simply fill in your household income and expenses, as well as any other debts you have, and the interest rates of loans you’re interested in. The calculator can then give you a rough estimate of your effective borrowing power – without affecting your credit score at all.

(Naturally, we can’t guarantee that a lending institution will allow you to borrow a certain amount, and this calculator should be used as a guide only.)

For a residential loan with a standard variable rate, you can see a potential difference of 0.12% in your average interest rates on offer, just by choosing a lower or higher LVR.

Residential
Standard Variable 3 Year Fixed
95% LVR 90% LVR 80% LVR 95% LVR 90% LVR 80% LVR
Min Rate (%) 3.95 3.95 3.88 3.89 3.89 3.89
Max Rate (%) 6.11 6.11 6.11 5.30 5.30 5.30
Average Rate (%) 4.90 4.87 4.78 4.38 4.37 4.36
Investment
Standard Variable 3 Year Fixed
95% LVR 90% LVR 80% LVR 95% LVR 90% LVR 80% LVR
Min Rate (%) 4.07 4.07 4.04 4.09 4.09 3.99
Max Rate (%) 6.00 6.02 6.02 5.30 5.30 5.34
Average Rate (%) 5.05 5.03 4.98 4.55 4.55 4.54
Source: www.canstar.com.au

Based on products on Canstar database and a loan amount of \$300,000 available for the corresponding LVRs.

### The increase in tiered home loan products

An increasing number of financial institutions are tiering their home loan products, across both owner occupier and investor categories. What this means is that the interest rate you get on your loan depends on your LVR.

#### Tiered residential home loans

At the time of writing, the Canstar database shows 32 standard variable residential home loan products with a tiered interest rate, from a range of 18 providers. The providers include:

• Click loans
• Firstmac
• Freedom Lend
• Homeloans
• Homestar Finance
• iMortgage
• Liberty Financial
• com.au
• Macquarie Bank
• Mortgage HOUSE
• MyState
• Northern Inland CU
• RESI Mortgage Corp
• State Custodians
• Summerland CU
• The Rock Building Society
• Victoria Teachers Mutual Bank

#### Tiered investment property loans

Our database also lists 34 standard variable investment home loan products with a tiered interest rate, from a range of 17 providers. The providers include:

• Bankwest
• Click Loans
• Firstmac
• Homeloans
• Homestar Finance
• iMortgage
• Liberty Financial
• com.au
• Macquarie Bank
• MyState
• Northern Inland CU
• RESI Mortgage Corp
• State Custodians
• Summerland CU
• Victoria Teachers Mutual Bank