The term loan-to-value ratio (LVR) shows the percentage of the total value of the property or asset that you’ve borrowed. A high LVR means the deposit you’ve gathered for your home is small, whereas a low LVR means you have a large deposit and are therefore borrowing less.
Think of it this way. If you have a 20% deposit of the property’s value, it means you will need to borrow the remaining 80%. That is your LVR.
Understanding your LVR is important as it can determine what home loans you can qualify for and what your interest rate will be. A good (lower) LVR can also help you avoid certain home loan fees such as Lenders Mortgage Insurance (LMI).
Here’s an in-depth explanation of how LVR works and what it means when you’re applying for a home loan.
What is loan to value ratio?
The LVR is the amount you need to borrow to buy a particular property, calculated as a percentage of the value of the property. The bigger your deposit, the lower the LVR.
If you have an LVR of 90%, this means you have a 10% deposit saved and must borrow the remaining amount. Whereas if you have an LVR of 70%, this means you have a 30% deposit saved.
You will often find every home loan product has a maximum LVR, which indicates how big your deposit should be in proportion to the property’s value.
Here’s an example:
- You are looking to purchase a property worth $800,000
- Your deposit is $160,000
- $160,000 is 20% of $800,000. This means you have an LVR of 80%
How to calculate your LVR
A lender will usually calculate your LVR by dividing the loan amount by the property’s value, and then multiplying it by 100.
For example, if you were looking at a property valued at $700,000 and had a $105,000 deposit, you would need to borrow the remaining $595,000 from a lender. By dividing the $595,000 (loan amount) by $700,000 (property value), we get 0.85, which multiplied by 100, means that your LVR is 85%.
($595,000 / $700,000) x 100 = 85% LVR
To wrap your head around it, here are examples of some other LVR calculations:
|Estimated property value||Deposit||Loan amount||LVR|
Head to InfoChoice’s Borrowing Power Calculator to find out the maximum you might be able to borrow and the required deposit size.
What is a good LVR?
Generally, an LVR of 80% or lower is considered ‘good' and is generally accepted as the industry standard for new lending.
From the lender’s perspective, a lower LVR typically carries less risk. This is because you have a proven history of savings (through a large enough deposit) - thus a lender can be more confident in lending you money and your ability to pay it back accordingly.
A lower LVR could also provide you access to lower home loan interest rates and favourable lending conditions - lower monthly interest repayments. Many existing homeowners looking to refinance have lower LVR because they have had a few years to pay off their home loan and have built up equity,
Plus, with an LVR of 80% or less, you’ll be able to avoid paying LMI which can be a hefty sum in itself. But more on that below.
Read More: How to double your deposit in half the time
Can I get a home loan with 95% or 100% LVR?
Yes, it is possible to get a home loan with an LVR of 95% or 100%, however they’re not available with every lender.
While a 95% LVR might mean paying LMI, it can get you into the property market sooner with a smaller deposit. As we know, saving for a home deposit can take a long time. And while you could choose to wait to avoid paying LMI, there’s also the possibility the value of the house could increase significantly over this period - $15,000 in LMI versus potentially $100,000+ in the capital value. You decide.
Some lenders may lend you above 95% - with some lenders it’s up to 110% - if your immediate family members (e.g. parent or guardian) are willing to act as a guarantor. This means they agree to be responsible for your mortgage if you find yourself unable to make your loan repayments. Using a guarantor might let you avoid the cost of LMI.
95% LVR Home Loans
Illawarra Credit Union – The Works Fixed (Principal and Interest) 1 Year
G&C Mutual Bank – First Home Buyer Loan Special (Principal and Interest)
Commonwealth Bank – Wealth Package Fixed Rate Home Loan (Principal and Interest) 5 Years
How can your LVR affect your LMI cost?
Your LVR plays a big decider in whether or not you pay LMI.
LMI is an insurance policy which covers the mortgage lender against losses they may incur in the event a borrower is unable to repay their loan (default on the loan). It is a one-off cost to a borrower.
If your LVR is over 80%, you’ll likely be required to pay LMI. It’s a cost that can run into the thousands if not tens of thousands of dollars, which is why it’s often recommended to aim for a 20% deposit.
Some lenders waive LMI if you are in a certain profession, such as in the medical field. Some others might also waive the cost if you have 85% LVR.
Further, many lenders will offer to bake the cost of LMI into the loan, meaning you pay it off as part of your home loan repayment. While this can avoid the shock of the upfront cost, it means you are borrowing more and paying interest on it.
Here’s a quick breakdown of what LMI can cost for a first-home buyer based on a 30-year home loan for various LVRs and property costs.
|Estimated property value||95% LVR||90% LVR||85% LVR|
If you want to avoid paying LMI and put yourself in a position to qualify for different home loan products with competitive interest rates, it could be worth saving enough to have an LVR of 80% or under.
How is your LVR calculated when you refinance?
When looking to refinance, your LVR is calculated a little differently.
Instead of a deposit, you need to calculate the equity in your property. This is the value of your property (not the price you paid), minus your remaining home loan debt.
Here’s an example:
- Your home is worth $700,000
- You have $420,000 left to repay on your home loan
- This means you have $280,000 in equity
($420,000 / $700,000) x 100 = 66.6% LVR
With an LVR of 60%, a refinancer would qualify for most home loans as lenders often have a maximum LVR of 80% for their products. This is where capital gains can come in handy when refinancing, because it means you may qualify for a lower LVR loan and hence a lower interest rate.
But keep in mind, if your property value has fallen and your LVR has risen, you may need to factor in paying LMI if the LVR ends up being over 80%. Many lenders will not let you refinance unless you have at least 20% equity for this reason.