LVR Meaning: What Is Your Loan-to-Value Ratio?

What is LVR?

LVR is the percentage of a property’s value that you are borrowing from a lender.

For example, let’s say you’ve found your ideal home, and the bank values the property at $500,000. You’ve managed to save a deposit of $100,000 (20% of the property’s value). To complete the purchase, you’ll need to borrow $400,000 (the remaining 80% of the property’s value). In this situation, the loan-to-value ratio is 80%.

What is a good LVR?

A good LVR is the lowest LVR you can afford. In general, you should aim for 80% or less, which means putting down a deposit of at least 20% of the home’s value.

A deposit of at least 20% will also help you avoid lenders mortgage insurance (LMI). This type of insurance acts as added protection for the lender and is required for deposits of less than 20%.

🤓 Nerdy Tip

Where your deposit comes from can also affect your ability to get a loan. Banks typically look more favourably on you if you have saved the money, as opposed to receiving a gift or loan from a generous relative or friend. Saved money is considered ‘genuine money’ or ‘genuine savings’ and demonstrates financial aptitude.

Simple LVR calculator

How to calculate your LVR manually

LVR, in the most basic form, compares a home’s value to the loan amount. To find it yourself, follow this formula:

Loan Amount ÷ Property Value × 100 = LVR

For example, if you have a $600,000 home loan on a property worth $800,000, your LVR is 75%. Here’s how the maths works:

$600,000 (loan amount) ÷ $800,000 (property value) = 0.75

To turn it into a percentage, you simply multiply the number by 100:

0.75 x 100 = 75%

LVR examples on an $800,000 property

Deposit	LVR
$50,000	94%
$75,000	91%
$100,000	88%
$150,000	81%
$200,000	75%

Why is LVR so important?

LVR is important because it helps your financial institution determine the level of risk associated with the home loan. If you have to borrow over 80% of the home’s value, they may be wary about your ability to repay the loan. As such, LVR is a major determining factor in how much they decide to lend you.

You should also be mindful of where and how you purchase the property when calculating your LVR. In some cases, such as in auctions, the bank’s property valuation may be considerably less than the purchase price.

For example, let’s say the bank values the property at $400,000, and you have a deposit of $80,000 (20%). But, come auction day, the price for the home leaps to $500,000, making your deposit only 16%. The bank may no longer agree to the loan. And even if they did, you’d likely be on the hook for LMI.

» MORE: What is conditional pre-approval for a home loan?

Benefits of a low LVR

Reduces your interest repayments. Buying a property is a major financial commitment that usually involves repayments spanning 20 or 30 years. So, the lower the percentage of the value you need to pay back over that period, the better. Using a loan calculator, such as the one provided by Moneysmart, can help you understand your payments over time and show you how a bigger deposit can help in the long run.
Increases your future borrowing power. A low initial LVR can benefit those who want to use the equity in their existing home to buy a second property, refinance or take out a line of credit home loan.
More freedom for first home buyers. Having a lower LVR can also mean that, as a first home buyer, you don’t need a guarantor for the loan. Often, a condition of a bank loan may involve a parent or someone else guaranteeing the loan against assets, such as their property. In the worst-case scenario, a guarantor may have to sell their property to pay off the loan if the borrower cannot meet mortgage repayments.
No LMI insurance. A lower LVR may mean you don’t have to pay LMI. In general, home loans with deposits of 20% or more do not require LMI.
Better interest rates. Finally, if your LVR is low, your lender may offer you a more attractive initial interest rate for the first few years of the loan or a fixed lower interest rate for far longer (possibly five years or more).