What Is LVR in Home Loans? Loan-to-Value Ratio Explained Simply
Applying for a home loan? One number could be the difference between making or breaking your application, and this number is your loan-to-value ratio, or LVR.
This percentage figure compares how much you're borrowing against the total value of the property you want to buy. Think of it as the flip side of your deposit – the bigger your deposit, the lower your LVR becomes.
The calculation is straightforward: divide your loan amount by the property's value and multiply by 100. Here's where it gets interesting for Australian home buyers. An LVR of 80% or below puts you in the lender's good books. Cross that 80% line, and suddenly you're in higher-risk territory.
Why does this matter? Your LVR directly shapes two critical factors: whether you'll get approved and how much you'll pay. A lower LVR typically unlocks better interest rates, while higher LVRs often trigger Lenders Mortgage Insurance (LMI) – an extra cost that protects the lender if you can't make repayments. Smaller deposits mean higher LVRs, which can also lead to additional fees like Low Deposit Premiums.
This guide breaks down everything you need to know about LVR – from getting your calculations right to proven strategies that improve your ratio before you apply for a home loan.
What is LVR in home loans?
The loan-to-value ratio measures the amount you're borrowing for a property compared to its lender-assessed value, expressed as a percentage. LVR specifically tracks your initial equity position in a property and serves as a cornerstone metric in the Australian mortgage industry.
Understanding the loan-to-value ratio
The LVR calculation follows a simple formula: divide your loan amount by the property's value, then multiply by 100 to get a percentage. Take this example – if you need to borrow $611,596 for a property valued at $764,495, your LVR sits at 80%. This calculation reveals exactly how much of the property you actually own versus how much you're financing through debt.
Important note: Lenders typically rely on their own valuation of the property rather than the purchase price. Should there be a difference between the bank's valuation and the market price, lenders will generally use the lower of the two figures when determining your LVR.
Why lenders use LVR to assess risk
Lenders treat LVR as their primary risk assessment tool when evaluating mortgage applications. The logic is straightforward – a higher LVR means you have less equity in the property, which presents increased risk to the lender. This becomes critical if you default on your loan, as the lender needs confidence they can recover their money through property sale.
The stakes rise as your LVR climbs. Qualification guidelines for mortgage programs become more stringent as your LVR increases. Lenders classify loans with an LVR above 80% as higher risk, directly affecting their lending decisions and the terms they're prepared to offer.
How LVR affects your borrowing power
Your LVR shapes both what you can borrow and what it costs you. Lower LVRs often unlock better interest rates, higher ongoing discounts, and more attractive package deals. Keep your LVR at or below 80% and you'll typically secure the lowest possible interest rate from most Australian lenders.
Cross the 80% threshold and the landscape changes quickly. You'll likely face Lenders Mortgage Insurance (LMI), which protects the lender if you default. Higher LVRs also attract higher interest rates to offset the increased risk. Most lenders cap their maximum LVR between 90-95%, meaning you'll need at least a 5-10% deposit to secure a home loan.
Your LVR doesn't just determine approval odds – it fundamentally affects how much you can borrow and at what cost.
How to calculate your LVR
Getting your LVR calculation right is essential – it determines your loan terms and approval chances.
The basic LVR formula explained
The formula couldn't be simpler: divide your loan amount by the property's value (as assessed by the lender), then multiply by 100 to get a percentage.
Here's how it works in practice. If you're borrowing $688,050 for a property valued at $917,390, your calculation would be: ($688,050 / $917,390) x 100 = 75% LVR.
One critical point: lenders will use their own valuation of the property for this calculation, not necessarily the purchase price. This can sometimes result in a different LVR than you might expect.
Example scenarios for better clarity
Let's look at different deposit situations:
Example 1: You've saved $152,899 toward a property valued at $764,495. You need to borrow $611,596.
Calculation: ($611,596 / $764,495) x 100 = 80% LVR
Example 2: With only a 10% deposit of $91,740 on a property valued at $917,394, you'd need to borrow $825,654.
Calculation: ($825,654 / $917,394) x 100 = 90% LVR
Example 3: For refinancing, if your remaining loan balance is $535,147 and your property is now worth $764,495.
Calculation: ($535,147 / $764,495) x 100 = 70% LVR
What's included and excluded in the calculation
The LVR calculation only includes the actual loan amount and property value. Upfront costs such as conveyancing fees and stamp duty are not included in the loan amount for LVR calculations.
Other purchasing expenses like building inspections, legal fees, and moving costs aren't factored into your LVR either. You'll still need to budget for these separately as they affect your overall financial position when buying property.
What influences your LVR and why it matters
Your LVR doesn't exist in isolation – several key factors shape this crucial percentage and determine how lenders assess your application.
Bank valuation vs. market value
Here's something that catches many Australian property buyers off guard: lenders don't use the purchase price to calculate your LVR. Instead, they order their own valuation to assess the property's quick-sale value while protecting their interests.
The bank's valuation often differs from market value, and when it does, lenders will use the lower figure to determine your LVR. This conservative approach means you might end up with a higher LVR than expected, even if you've calculated everything perfectly based on the purchase price.
How deposit size impacts LVR
Your deposit size creates a direct relationship with your LVR – but the financial impact extends far beyond the percentage itself. Consider this: increasing your deposit from 5% to 20% drops your LVR from 95% to 80%. That shift can save you almost $880 per month in repayments on the same property.
The difference between an 80% LVR and a 95% LVR isn't just about approval odds – it's about the long-term cost of homeownership.
The role of property location and type
Property characteristics significantly influence how lenders view your LVR. Melbourne and Sydney properties in established suburbs typically receive more favorable treatment than regional properties or unique designs. This reflects lenders' confidence in resale potential and market stability.
Remote properties, unconventional designs, or commercial properties often face stricter LVR limits. Lenders consider these higher risk due to potentially limited buyer pools if they need to sell quickly.
Why LVR affects interest rates and loan approval
The 80% threshold isn't arbitrary – it represents a fundamental shift in how lenders price risk. Cross this line, and you'll face higher interest rates designed to offset the increased risk to the lender.
More importantly, exceeding 80% LVR triggers Lenders Mortgage Insurance requirements, adding thousands to your borrowing costs. Since lenders need assurance they can recover their money if you default, your LVR becomes the primary factor determining both approval chances and loan pricing.
Managing high LVR: options and strategies
A high LVR doesn't lock you out of the property market—smart strategies can turn this challenge into an opportunity.
When LVR exceeds 80%
The 80% mark represents the industry's risk threshold. Beyond this point, you'll face stricter lending criteria and higher costs. Most Australian lenders cap their LVR between 80-90%, though approval above these limits often hinges on factors like steady income and strong credit history.
Understanding Lenders Mortgage Insurance (LMI)
Here's what many borrowers misunderstand: LMI protects the lender, not you. You pay the premium, but the insurance only covers the lender's potential losses. The cost escalates with higher LVRs—a 5% deposit on a $1 million property could trigger LMI premiums exceeding $55,000 over a 30-year term.
Key Point: LMI isn't necessarily bad—it allows you to enter the market sooner rather than waiting years to save a larger deposit.
Using a guarantor to reduce LVR
Family security guarantees offer a powerful solution for Australian borrowers. An immediate family member can use their property equity as additional security, potentially dropping your LVR below the 80% threshold.
Consider this scenario: parents with a $1.2 million home could offer around $114,000 of their equity to secure your loan. Once you build 20% equity, you can release the guarantor from their obligations.
Tips to lower your LVR before applying
Practical strategies that work:
- Boost your deposit – the most direct approach
- Target a lower-priced property – reduces your borrowing requirement
- Request a property revaluation – market improvements might work in your favour
- Explore government incentives – first home buyer grants can increase your effective deposit
The key question becomes: Can you afford to wait, or should you enter the market now with a higher LVR?
Conclusion
Your LVR isn't just another number on your loan application—it's the key that unlocks better rates, lower costs, and smoother approvals.
Cross that threshold, and you'll face higher costs, but homeownership doesn't have to slip away. Smart strategies like family guarantors, larger deposits, or choosing properties within your means can still get you there.
Here's what matters most: lenders always use their own property valuations, not the purchase price. Research thoroughly before making offers to avoid surprises during your application process.
The calculation itself is simple, but the impact on your financial future is enormous. Your LVR shapes not just whether you'll get approved, but how much you'll pay over the life of your loan.
Ready to take the next step? Calculate your LVR using the formula we've covered, explore your deposit options, and approach lenders armed with the knowledge to secure the best possible terms for your Australian home loan.