What is loan-to-value ratio (LVR) and what can it mean for your home loan?

How can LVR affect your home loan eligibility? Importantly, how could lowering your LVR save you money when you take out a home loan?

You may be wondering too:

What is the LVR on a home loan?

The term ‘LVR’ stands for loan-to-value ratio, and it refers to a calculation lenders use to express the size of your home loan as a percentage of the value of the property you’re buying. In practical terms, your LVR is determined in large part by the size of your home deposit.

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. Here’s a hypothetical example – if you apply for a loan of $400,000 from the bank to purchase a house which is valued at $500,000, the LVR would be 80%.

The difference between the size of your home loan and the value of the property you’re buying is typically made up of your home deposit. If the borrower were to increase the size of their deposit, this would lower the LVR of the same loan on the same property. Alternatively, if the same deposit amount were being used for the same loan on a property with a lower value, that would also result in a lower LVR.

How does your LVR affect how much you can borrow?

Generally, a lender will only let you borrow as much as they think you’ll be able to repay. The LVR on a proposed loan is one of the factors that helps your lender assess your capacity to pay back the loan you’re applying for. This, in turn, protects borrowers against the risk of getting into financial hardship, and protects banks from the risk of a borrower defaulting on their loan. Therefore, most lenders have a maximum LVR they’ll approve on their home loans.

For example, if a hypothetical 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 full amount of the loan if you can’t meet your repayments are not met.

How can your LVR affect your deposit?

If you’re not sure how much of a deposit you might need to save up, you could calculate it based on the maximum LVR available 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 at least $70,000 to be eligible for that loan. However, if the maximum LVR for the loan were 60%, you would be required to have a deposit of at least $140,000. Bear in mind that the property value a lender uses to calculate your LVR may not necessarily be the same as the listed purchase price.

The following table provides further examples of how the required LVR can affect how large a minimum deposit you need to be approved for a loan.

Property value Maximum LVR Minimum deposit required
$400,000 95% $20,000
$400,000 90% $40,000
$400,000 80% $80,000
$400,000 70% $120,000
$400,000 60% $160,000
Source: canstar.com.au 

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.

Borrowers with a high LVR are generally considered higher -risk, and may have fewer options when shopping around for a loan. For example, at the time of writing, more than twice as many owner-occupier home loans (1,346) on the Canstar database are available to borrowers with an 80% LVR, compared to home loans where a borrower with an LVR of 95% would be eligible (619).

For investor loans, 1,384 home loans on our database are available to borrowers with an LVR of 80%, whereas only 314 are available to borrowers with an LVR of 95%.

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 save up more of a deposit. Alternatively, you could look around for a lower-value property to potentially have a lower LVR using the same deposit.

Do you need to pay for lenders mortgage insurance (LMI)?

LVR is linked closely to another term that’s commonly mentioned when applying for a home loan – LMI, or lenders 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 ask you to pay for LMI.

Having an LVR of 80% or less may help you avoid having to pay for LMI, which could have a big impact on your regular home loan repayments.

If you are required to pay LMI to get a home loan, the cost is typically added to your loan amount and paid off gradually with the rest of the loan. You may be charged interest on the LMI on top of the loan amount.

The government’s First Home Loan Deposit Scheme could help you avoid paying LMI, even if your saved deposit is as little as 5% of your desired property’s value. However, the scheme is only available to 10,000 borrowers per year, and you’ll have to check the eligibility requirements to see if you’re eligible or not. Lender St. George also announced it would be reducing its lenders mortgage insurance premium to $1 from Monday 13 July, 2020, for eligible first home buyers who have a 15% deposit saved up.

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 will generally dictate which loans you are eligible for, and the interest rate that will be attached to those loans.

Because a higher LVR generally poses a higher risk to the lender , they may charge a higher interest rate to borrowers with smaller deposits, or simply exclude borrowers with high LVRs from being able to apply for certain loans.

Looking at the variable rate residential loans on our database at the time of writing, there’s a potential difference of 0.33 percentage points in the average interest rates on offer because of how high or low your LVR is.

Min, Max and Average Home Loan Rates by LVR
Owner Occupier
Variable 3 Year Fixed
80% LVR 90% LVR 95% LVR 80% LVR 90% LVR 95% LVR
Minimum Rate 2.19% 2.39% 2.64% 1.99% 1.99% 2.16%
Average Rate 3.44% 3.57% 3.77% 2.56% 2.60% 2.60%
Maximum Rate 5.39% 5.07% 5.07% 4.49% 4.49% 4.09%
Investment
Variable 3 Year Fixed
80% LVR 90% LVR 95% LVR 80% LVR 90% LVR 95% LVR
Minimum Rate 2.69% 2.79% 3.05% 2.29% 2.39% 2.44%
Average Rate 3.84% 3.98% 4.22% 2.89% 2.95% 2.98%
Maximum Rate 5.91% 5.91% 5.15% 4.24% 4.19% 4.38%
Source: www.canstar.com.au – 16/07/2020. Based on loans on Canstar’s database available for a loan amount of $400,000 and principal & interest repayments; excluding introductory and first home buyer only loans.

Some financial institutions also offer different interest rates on the same home loan, in line with a range of different LVRs. 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.

What are the potential pros and cons of lowering your LVR?

To recap, having a lower LVR could save you money over the life of a loan, but depending on your situation, there may be some possible drawbacks to consider too before deciding on an approach.

Benefits of having lowering your LVR

  • A larger deposit relative to the size of your loan means you have less money to repay, and you would be charged interest on a smaller loan amount.
  • You may receive a more competitive interest rate on your loan.
  • You typically would have a wider range of products to choose from, particularly if your LVR is below 80%.

Drawback of lowering your LVR

  • It may take you a significant amount of time to save up a larger deposit to reach your target LVR, which could delay your home purchase. This could set you back if property values increase in that period.
  • Putting money towards lowering your LVR means possibly missing out on putting that money to other uses, such as building up an emergency fund or investing for your retirement.

The comparison tables below display some of the variable rate home loan products on Canstar’s database with links to lenders’ websites, for borrowers in NSW making principal and interest repayments on a loan of $350,000 with an 80% LVR. You can choose between the refinance, first home and investing tabs to view results most relevant to you. The results are sorted by ‘current rate’ (lowest to highest). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.

Lowest interest rates for refinance home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for first home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for investing home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

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