How LVR impacts your home loan
- LVR means loan-to-value ratio — it's your loan amount expressed as a percentage of the value of your property.
- Your LVR can have a big impact on whether you're eligible for a home loan and what it will cost you.
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What is LVR 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.
Keep in mind each lender has its own method of determining the valuation of each property in Australia, 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. Get your mortgage broker to ‘shop the valuation’ across 3-5 lenders to see who gives you the best valuation; this will get you the best LVR and the best deal on your home loan.”
Mansour Soltani, Money.com.au's home loan expert
How does LVR impact your home loan?
LVR is lenders' most important metric when assessing your home loan application and home loan interest rate, according to Mansour Soltani, Money.com.au's home loan expert. 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 particularly high risk. That's why if your LVR exceeds 80%, you generally have to pay for lender's mortgage insurance (LMI) — 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.
LVR affects 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 ANZ.
Compare LVRs for different property values
Property value | $200,000 |
|---|---|
| Loan amount 60% LVR | $120,000 |
| Loan amount 80% LVR | $160,000 |
| Loan amount 90% LVR | $180,000 |
Property value | $300,000 |
| Loan amount 60% LVR | $180,000 |
| Loan amount 80% LVR | $240,000 |
| Loan amount 90% LVR | $270,000 |
Property value | $400,000 |
| Loan amount 60% LVR | $240,000 |
| Loan amount 80% LVR | $320,000 |
| Loan amount 90% LVR | $360,000 |
Property value | $500,000 |
| Loan amount 60% LVR | $300,000 |
| Loan amount 80% LVR | $400,000 |
| Loan amount 90% LVR | $450,000 |
Property value | $600,000 |
| Loan amount 60% LVR | $360,000 |
| Loan amount 80% LVR | $480,000 |
| Loan amount 90% LVR | $540,000 |
Property value | $700,000 |
| Loan amount 60% LVR | $420,000 |
| Loan amount 80% LVR | $560,000 |
| Loan amount 90% LVR | $630,000 |
Property value | $800,000 |
| Loan amount 60% LVR | $480,000 |
| Loan amount 80% LVR | $640,000 |
| Loan amount 90% LVR | $720,000 |
Property value | $900,000 |
| Loan amount 60% LVR | $540,000 |
| Loan amount 80% LVR | $720,000 |
| Loan amount 90% LVR | $810,000 |
Property value | $1,000,000 |
| Loan amount 60% LVR | $600,000 |
| Loan amount 80% LVR | $800,000 |
| Loan amount 90% LVR | $900,000 |
Property value | $1,500,000 |
| Loan amount 60% LVR | $900,000 |
| Loan amount 80% LVR | $1,200,000 |
| Loan amount 90% LVR | $1,350,000 |
| Property value | Loan amount 60% LVR | Loan amount 80% LVR | Loan amount 90% LVR |
|---|---|---|---|
$200,000 | $120,000 | $160,000 | $180,000 |
$300,000 | $180,000 | $240,000 | $270,000 |
$400,000 | $240,000 | $320,000 | $360,000 |
$500,000 | $300,000 | $400,000 | $450,000 |
$600,000 | $360,000 | $480,000 | $540,000 |
$700,000 | $420,000 | $560,000 | $630,000 |
$800,000 | $480,000 | $640,000 | $720,000 |
$900,000 | $540,000 | $720,000 | $810,000 |
$1,000,000 | $600,000 | $800,000 | $900,000 |
$1,500,000 | $900,000 | $1,200,000 | $1,350,000 |
What is the best LVR for a home loan?
Generally, an LVR of 60% or less means you will be able to access the best interest rate on your home loan. From the lender’s perspective, a lower LVR means a lower risk. From a borrower’s perspective, a lower LVR means a better deal on your home loan with lower repayments.
If your LVR is lower, you'll have more equity in your home right from the start, and you may benefit from a lower home loan interest rate than the interest rate applicable with a higher LVR.
Generally it's only people who are refinancing an existing loan who have LVRs low enough to qualify for the best rates.
What’s not included in the loan amount when calculating LVR?
Upfront costs such as conveyancing and stamp duty are not included in the loan amount for LVR calculations. The loan-to-value ratio is the amount you need to borrow as a percentage of the total value of the property.
Is LVR based on the property’s valuation or purchase price?
If the property's purchase price differs from the bank's valuation, the lender and its mortgage insurer will often use the lower of the two when determining the LVR.
One typical example is off-the-plan purchases, where the property's value may have either increased or decreased between when the contract of sale was signed and settlement day (when ownership is officially transferred). If the property’s value increases, this works in your favour, resulting in a more favourable LMI assessment (and a lower rate). But the opposite could be true.
Another equally common situation that can create variations in the purchase price and bank valuation is when a borrower is looking at buying a property from a family member at a discounted price. This scenario is commonly referred to as a ‘favourable purchase’. In this case, lenders often calculate the LVR based on their own valuation instead of the purchase price.
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
There are other reasons your lender may reduce the LVR limit, mostly revolving around the difficulty to re-sell or evaluate the property's long-term value. This may include:
- The property you’re buying is unusual and has a smaller pool of available or potential buyers (e.g. sustainable homes, properties with unconventional designs, etc.)
- The property is in a remote location, which hinders its marketability
- The property has certain restrictions imposed on it that prevent it from being sold in a standard manner. This can include heritage-listed properties, serviced apartments and display homes.
- The property and similar properties in the area have significant difficulty selling or have not been shown to have sold easily in the previous 6-12 months.
- You're buying a new property before your current one has sold. This is usually done through a bridging loan, which typically requires a lower LVR than standard home loans.
The easier it is to assess the current and future value of a property, and its eligibility to be sold, the less likely a lender is to impose LVR restrictions.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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Written by
Senior Finance Writer
Megan Birot
Reviewed by
Home Loans Expert
Mansour Soltani
