What is a loan-to-value ratio? How to calculate LVR
In home loans, a loan-to-value ratio (LVR) is the amount you’re borrowing, expressed as a percentage of the value of the property you’re buying. For example, 80% LVR means you’re borrowing 80% of the value of a property.
It’s important to know what LVR is because it can affect the home loan rates you are offered and your ability to flexibly switch and save by refinancing later down the line.
What does LVR stand for?
LVR stands for loan-to-value ratio. The ‘L’ refers to the loan amount (i.e. how much you borrow) and the ‘V’ represents the value of the property, or how much the home costs.
How is LVR calculated?
You can calculate LVR by using a simple formula. The LVR formula is LVR = (Loan ÷ Property value) x 100.
For example, if you borrow a $600,000 home loan to buy a $750,000 property, your LVR would be 80%.
How is the property value assessed for LVR?
There are two types of property valuation: market and bank valuations. For calculating LVR, you can use the market value of a property to get a rough idea of your LVR. But, when getting a home loan, the bank’s valuation will be the official figure used for your LVR.
Market valuation vs bank valuation
A market valuation is usually a real estate agent’s estimate of a property’s value in the current market.
Bank valuations tend to be more conservative than market valuations and take into account how much they might get from selling the property if you can’t repay your loan, as part of its risk assessment.
Bank valuations tend to be more conservative than market valuations, as it is a part of their risk assessment process. This is because banks take into account what they may get from selling the property if, for instance, you can’t repay your loan.
What is a good LVR?
A good LVR is considered to be 80%, or below, as a 20% deposit is the norm in Australia.
Typically speaking, a low LVR is better than a higher LVR, as it means you own a larger portion of your home and are less likely to struggle with paying off the rest of your home loan.
So, a low LVR is viewed more favourably by home loan lenders, which is why they usually charge lower rates.
What if I have a bad LVR?
A ‘bad’ LVR usually means you’re borrowing more than 80% of the property’s value. If you have a bad LVR, or less than a 20% deposit, then you may have to pay lenders mortgage insurance (LMI).
This is common among first home buyers, so there are lenders out there that make special considerations for those with 10% deposits (or 90% LVR), for example, that may not charge LMI.
There are also several home loan grants and schemes available, which may mean you can buy with a low deposit and get away without paying LMI.
How does LVR affect interest rates?
According to the Mozo database, there’s a link between low LVR and low home loan interest rates. This also means that high LVRs usually correspond to higher interest rates.
For example, the following table shows the difference LVR makes on a $400,000, owner-occupied, variable home loan, with principal and interest repayments (correct as at 7 August 2024):
| Loan-to-value ratio (LVR) | Average interest rate |
| 60% LVR | 6.72% p.a. |
| 70% LVR | 6.76% p.a. |
| 80% LVR | 6.80% p.a. |
| 90% LVR | 7.08% p.a. |
| 95% LVR | 7.35% p.a. |
How to reduce LVR
Depending on whether you are looking to buy a home for the first time, or if you’re already part of the way through your mortgage, there are a few ways to reduce your LVR to gain access to more favourable interest rates.
I’m buying a home and want to reduce my LVR
- Save up a larger deposit. A larger deposit will reduce the amount you have to borrow. In turn, this reduces your LVR.
- Look at cheaper properties. Lowering the value of the property you want to buy means a smaller loan size and a larger deposit, relative to your home loan.
- Apply for a government home-buyer grant. Several home loan grants and schemes are available that help eligible buyers (usually first-home buyers) purchase a property with a deposit as low as 2%, eliminating the need to pay LMI or worry about reducing your LVR.
- Use a guarantor. A guarantor can help you reduce the amount you need to borrow by putting up a portion of their property as security for your home loan. This has its risks, so do your research about going guarantor on a mortgage before you choose this option.
I already own my home and want to reduce my LVR for refinancing
- Make extra repayments. If you already own your own home but want to lower your LVR, then making extra repayments can help you reduce your outstanding loan balance faster. As a result, you’ll start to own more of your home than the bank does, increasing your home equity and lowering your LVR.
- Use an offset account to reduce accumulated interest. If you make principal and interest repayments, a good chunk of your monthly bill will be dedicated to paying off interest. By reducing your home loan interest with an offset account, you pay off more of the principal and could reduce your LVR quicker.
FAQs
What are LVR restrictions?
Some lenders will have postcode or other LVR restrictions in place, as part of their risk management policies. Postcode restrictions on LVR may mean that the area you’re looking to purchase in doesn’t have a very active or profitable housing market. As a result, a lender may consider it a higher-risk investment for the business, and tighten the LVR requirements for you.
Other times, lenders will have a maximum LVR requirement for specific home loan products. For example, a loan might have a maximum 60% LVR requirement, meaning that only those with a 40% deposit may apply.
How to calculate LVR with equity
If you have had your home loan for some time and consistently made repayments, you will likely have equity in your property. Equity counts towards your LVR in the same way that a home deposit does. So, if you have a 30% deposit, or you own 30% of your home through regular repayments already, your LVR will be 70%.
To calculate LVR with equity, you’ll need to find out how much equity you have in your property and use the LVR formula (above) to work it out.
Check out our guide on the difference between LVR and equity for more information.
Does LVR include stamp duty?
Due to stamp duty always being paid by the buyer, and not included in your home loan, it does not factor into LVR calculations.
