Loan-to-Value Ratio Calculator

What is LVR?

When you’re borrowing money from a lender to buy a house, you often hear the term LVR, which stands for loan-to-value ratio. LVR represents a percentage of the loan versus the total value of your property.

For instance, if you purchase a home for $500,000 and put down a $100,000 deposit, you will be borrowing $400,000. Based on this scenario, LVR can be calculated using the formula below:

($400,000 loan amount ÷ $500,000 property value) x 100 = 80% LVR

Upfront costs when taking out a home loan are not included in the LVR calculations. These upfront costs include transactions like conveyancing and stamp duty fees. 

How does LVR affect home loans? 

LVR applies to all property loans whether you are buying or refinancing an owner-occupier property or an investment property. LVR can also be the risk basis of the lender, meaning if you have a low LVR, lenders consider you as a lower risk borrower. A higher LVR, typically above 85%, puts you at a higher risk and it is likely you will be required to pay lender’s mortgage insurance (LMI).

A higher LVR will not only trigger you to pay LMI, but it can also leave you with larger mortgage repayments because you have borrowed more money. In comparison, borrowers with a lower LVR often aim to have 20% of the property value as their deposit, reducing their regular repayments.

Take note that each lender will have their own maximum LVR, so some lenders may be able to offer a loan with an LVR up to 90% or even 95%.

How does a lender determine the property value when working out LVR?

Lenders will require a property valuation to determine the price of the house you’re buying. They will typically obtain their own independent property valuation. When it comes to determining the price, the valuation firm will consider the size of land and house, type of property (if it’s a house, townhouse or apartment), number of rooms, location, fixtures and fitting, and the overall condition of the house.  

What is a good LVR?

A good LVR score to aim for when you apply for a home loan is 80% or below, to avoid paying for lender's mortgage insurance. LMI is designed to protect the lender in the instance their borrower cannot make repayments on their mortgage.

A lower LVR can also result in a lower monthly repayment, so it’s recommended to save at least 20% of the property price as the deposit on your property. 

Can LVR change over the loan term?

It's possible for the LVR to change because property prices can change over time, impacting the loan amount. If you are not able to pay off much of the principal of the loan even within a few years, the value of the property can increase and decrease, influencing your LVR. Your LVR will also be affected by your repayments. As you continue to pay down your loan, your equity is likely to increase, reducing your LVR.

How can I improve my LVR before I purchase a property?

The best way you can improve your LVR is to boost your home deposit. Saving a big deposit will not only reduce your monthly mortgage repayment and help you avoid paying for LMI, but it can also get you a lower interest rate which can help you save money overall. 

Another way to improve your LVR is to look to buy a more affordable property, and ensure you are getting a fair valuation on it before buying.