What does LVR mean in home loans?
LVR or loan-to-value ratio is your loan amount represented as a percentage of your property's value. LVR is calculated by dividing the loan amount by the property value, then multiplying that by 100.
Here's a simple LVR calculation for a property valued at $600,000 and a buyer with a $150,000 deposit, resulting in a $450,000 home loan amount.
$450,000 (loan amount) ÷ $600,000 (property value) = 0.75 x 100 = 75% LVR
The larger your deposit when applying for a home loan, the lower the LVR will be as a result.
How does LVR impact your home loan?
LVR is lenders' most important metric when assessing your home loan application and deciding on your home loan interest rate, according to Money.com.au mortgage broker, Katey Russo. That's because it's one of the big indicators of your risk as a borrower.
Generally, lenders consider loans with a loan-to-value ratio over 80% of the property value to be a higher risk. As a result, if your LVR is over 80%, you may need to pay for lender's mortgage insurance (LMI), which is a one-off insurance premium that covers the lender against the risk of default.
There are several government schemes that help eligible first home buyers with low deposits avoid the need to pay for LMI.
Lenders' rules on LVR also affect your borrowing power and interest rate. That's why when you see a rate advertised, you'll often see 'based on an LVR of X' in the fine print. The lower your LVR, the lower the risk to the lender and the lower your rate may be. See this example from ING.
Despite its importance, Money.com.au consumer research shows that LVR one of the least-understood financial concepts, with 37% of Aussies saying they couldn’t properly explain it to someone else.
Why property valuation matters for your LVR
Of the two factors that your LVR is based on, it's much easier to meaningfully influence the property valuation. Reducing your loan amount by saving up a higher deposit generally takes time, but simply asking for an alternative property valuation can make an immediate difference.
Each lender has its own method of determining a property’s value, and sometimes one bank's valuation will be higher (or lower) than the next. This could be the difference between getting a good rate and a great rate. Or having your home loan approved at all.
If your LVR is on the borderline, get your mortgage broker to ‘shop the valuation’ across three to five lenders to see who gives you the best valuation.
Client case study: How a second valuation secured the right LVR
Yang Qiu, Money.com.au Senior Mortgage Broker
“Our client had signed a contract and paid a 5% deposit for an off-the-plan townhouse in Melbourne. But the lender she was working with initially came back with a property valuation well below the $1.2m purchase price and wouldn’t approve the loan due to the high LVR.
We approached a number of alternative lenders and arranged for new and more detailed valuations factoring in upgrades to the property. As a result, we secured a valuation for the full purchase price from a major bank, bringing the LVR down to 92%. This meant the client could proceed with her purchase rather than lose the property.”
Yang Qiu, Money.com.au Senior Mortgage Broker
What is a good LVR?
A loan-to-value ratio (LVR) of 80% or less is generally seen as ‘good’, but the most competitive rates are often reserved for borrowers with an LVR of 60% or less. For lenders, a lower LVR means reduced risk; for borrowers, it usually means better interest rates, lower home loan fees and more favourable loan terms.
Homeowners refinancing an existing loan typically have lower LVRs and are more likely to qualify for the best rates. However, first home buyers with a large deposit relative to their property's value may also be able to access competitive deals.
If you’re purchasing a property, upfront costs such as conveyancing and stamp duty are not included in the loan amount for LVR calculations. These are out-of-pocket expenses that will need to be budgeted for leading up to settlement.
We analysed more than 20,000 Money.com.au home loan customers and found the average LVR on a mortgage in Australia is 60.6%.
For those buying a home, the average LVR is higher at 79.6%, while those refinancing an existing loan have an average LVR of 49.7%.
Why do lenders have maximum LVR limits?
Banks and other major lenders cap the LVR on home loans to mitigate their risk. The maximum LVR most lenders will accept is 90-95% of the property’s value, while some may not accept a loan-to-value ratio over 80%.
If your lender determines you’re a high-risk borrower (e.g. you are applying for a low doc home loan), it may limit your maximum LVR to reduce the risk of you defaulting on your home loan repayments.
Here’s a common example of when a lender may impose an LVR limit:
- Let’s say you apply for pre-approval to buy a home for $500,000.
- You have a $25,000 deposit to contribute towards the purchase.
- The home loan amount you apply for is $475,000.
- This results in a 95% LVR, which is very high but still within the lender’s maximum.
- However, you have a default on your credit file, so you may only be eligible for a bad credit home loan with a maximum of a 90% or 80% LVR.
Other reasons lenders may reduce LVR limits
The easier it is to assess the current and future value of a property and how easily it could be sold, the less likely a lender is to impose LVR restrictions. But there are several scenarios where lenders commonly apply LVR restrictions, including:
The property is unusual
The property you’re buying has an unconventional design, layout or size. For example, it might have characteristics that most buyers aren’t in the market for, such as an outhouse toilet or a questionable feature wall.
It comes with restrictions
Restrictions are imposed on the property that prevent it from being sold in a standard manner. This can include heritage-listed properties, serviced apartments and display homes.
You’re buying before selling your existing property
This is usually done through a bridging loan, which allows you to buy a new home before selling your current one. Because you’re temporarily carrying more debt, lenders may impose stricter lending criteria, including tighter LVR limits.
It’s in a remote location
You’ve heard the old saying, “location, location, location” – and it definitely applies here. Properties in remote or less accessible areas can be harder to sell, which may impact their marketability and appeal to lenders.
Similar properties have had difficulty selling
The property or similar properties in the area have slow to sell or haven't been selling at all in the previous 6-12 months.
The LVR affects eligibility for a cashback offer
Usually if lenders have a special promotional offer (home loan cashback offers are the most common example), they will have a lower LVR limit for being eligible for the offer. For example, you might be eligible to apply for the home loan with an LVR of up to 95%, but you wouldn't qualify for the cashback offer unless your LVR is below 80%.
