What Is Loan To Value Ratio (LVR) & What Can It Mean For Your Home Loan?

When you’re applying for a home loan, what does your LVR mean? How can it affect what loan you might be able to get and at what cost? Importantly, how could lowering your LVR save you money when you buy a home?

What is the LVR on a home loan?

LVR stands for loan-to-value ratio, or loan-to-valuation ratio, and it refers to a calculation lenders use to express your home loan amount as a percentage of the value of the property you’re buying. In practical terms, your LVR is determined in large part by how much of a home deposit you have. 

How is your Loan to Value Ratio calculated?

When you apply for a home loan, your lender will typically obtain an independent valuation of the property you’re buying. The lender will then calculate the LVR on your home loan by dividing the loan amount by this valuation. This figure is then multiplied by 100 so that the ratio is expressed as a percentage. For example, if you apply for a loan of $400,000 from the bank to purchase a house it values at $500,000, the LVR would be 80%. 

The difference between the two figures used in the calculation is typically made up of the home deposit which the borrower has accumulated. If the borrower were to increase their deposit, this would lower their LVR on the same property. Alternatively, if the same deposit amount were being used for a loan on a property with a lower value, the LVR would be lower in that instance too. 

How does the LVR affect how much you can borrow?

Generally, a lender will only lend as much as they reasonably expect a borrower to be able to repay. The LVR is one of the factors that helps banks and other financial institutions assess a borrower’s capacity to pay back the loan they’re applying for. Doing this is designed to protect borrowers from getting into financial hardship and to protect banks from risk. Therefore, most lenders usually place a maximum LVR on their home loans. 

For example, if a loan has a maximum LVR of 80% and the property you wish to purchase is valued at $300,000, the most that the lender would let you borrow would be $240,000.

Financial institutions also typically do not lend more than the value of the property, as they must ensure that selling the property will recover the amount of the loan if repayments are not met.

*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning

How can your LVR help determine how much deposit you need?

If you’re not sure how much of a deposit you need to save up, you could calculate it based on the maximum LVR at which a lender says it will offer on a home loan. For example, if you wanted to purchase a property valued at $350,000 and the lender stipulated a maximum LVR of 80%, you would need a deposit of $70,000 to be eligible for that loan. However, if the maximum LVR for the loan were 60%, you would be required to deposit $140,000. Bear in mind that the lender’s property valuation that it uses to calculate your LVR may not necessarily match the purchase price you pay to the seller.

The following table provides further examples of how the LVR can affect the deposit required for a loan. 

Property value 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
Source: canstar.com.au as at 25/07/2019.

Should you consider the LVR when applying for a home loan?

It’s important to consider how much a financial 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. As loans with a higher LVR (or in other words, borrowers with a lower deposit) are generally viewed as being higher risk for banks, they often place an upper limit on the LVR a borrower must meet in order to be eligible for a loan. This means that borrowers with a high LVR may have fewer options when hopping around for a loan. For example, at the time of writing, almost twice as many loans (152) on the Canstar database are available to borrowers with an 80% LVR, compared to loans where a borrower with an LVR of 95% would be eligible (89). 

For investor loans, according to Canstar research only a quarter of loans are available to borrowers with a 95% LVR.

Working out an estimate of what your LVR would be can help you to determine if you are ready to apply for a home loan or if you need to build up more of a deposit or consider different properties.

Do you need to pay for LMI?

This can be confusing, but LVR is linked closely to another set of letters commonly encountered in relation home loan, LMI, or lender’s mortgage insurance. This is insurance that protects the lender if you default on your home loan repayments. As a loan with a high LVR is generally considered to be riskier for the lender, banks and other financial lending institutions often require that loans over a specific LVR threshold, typically 80%, be covered by LMI. This means that if your deposit is less than 20% of your property’s value, your lender may well ask you to pay for LMI.

On the other hand, lowering your LVR below this threshold by putting down a bigger deposit or choosing a different property may help you avoid the cost of LMI, which can be thousands of dollars and doesn’t provide any cover to you as the borrower.

If you do require LMI to get a home loan, the cost is typically added to your loan amount and paid off with the rest of the loan. You may therefore be charged interest on the LMI along with the rest of the loan amount.

How could your LVR affect the cost of your loan?

As well as its potential impact on whether you need to pay for LMI, your LVR may dictate which loans you are eligible for and at what interest rates. Because a higher LVR is generally considered to mean more risk for the lender, they may charge a higher rate of interest to borrowers with smaller deposits. For example, lenders may place a maximum LVR on some of their most competitively priced products, thus excluding applicants with a high LVR, who may therefore be forced to choose a product with a higher interest rate unless they can save up a larger deposit.

For a residential loan with a standard variable rate, you can see that based on Canstar’s database, there’s a potential difference of 0.12 percentage points in the average interest rates on offer, just by choosing a lower or higher LVR.

  Standard Variable 3 Year Fixed
  95% LVR 90% LVR 80% LVR 95% LVR 90% LVR 80% LVR
Min Rate 3.19% 3.07% 2.89% 2.99% 2.99% 2.99%
Max Rate 5.63% 5.63% 5.68% 5.05% 5.05% 5.05%
Average Rate 4.41% 4.26% 4.16% 3.75% 3.72% 3.71%
  Standard Variable 3 Year Fixed
  95% LVR 90% LVR 80% LVR 95% LVR 90% LVR 80% LVR
Min Rate 3.59% 3.44% 3.34% 3.58% 3.09% 3.09%
Max Rate 6.50% 6.54% 6.54% 5.35% 5.35% 5.35%
Average Rate 4.83% 4.69% 4.57% 4.15% 4.03% 4.02%
Source: www.canstar.com.au as at 16 July 2019. Based on products on Canstar database and a loan amount of $400,000 available for the corresponding LVRs for a principal and interest loan.

Some financial institutions also tier the rates on home loan products. This means that different borrowers could end up paying higher or lower interest rates on the same loan depending on their LVR, with lower LVRs typically meaning lower interest rates.

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