Mozo guides

What is LVR? How loan-to-value ratios affect your home loan

A seesaw balanced with a model house one end and a pile of coins on the other end, representing the loan-to-value ratio.

The world of home loans has enough confusing terms and acronyms to fill a dictionary. So, if you’ve been researching home loans, one of the key terms you’ve probably come across is ‘loan-to-value ratio’. 

A loan-to-value ratio (LVR) has a lot to do with your deposit size. It essentially measures the amount you need to borrow compared to the property’s value, as a percentage. The larger the deposit, the lower your LVR.

Knowing your LVR is important because it affects whether a bank will approve your loan and the interest rates they charge you.

How LVR affects your home loan rate

Banks and other home loan lenders use LVR to assess your lending risk. In most cases, the higher your LVR is, the more risk you present on paper.

Lenders typically consider an 80% LVR as good, with LVRs below that threshold attracting the most favour. 

An LVR above 80% is often viewed less favourably (although, plenty of lenders offer low-deposit home loans for LVRs over 80%). 

The benefits of having a low LVR 

Having a lower LVR is beneficial for a few reasons. First, you have a smaller loan to repay. This means you’ll typically pay less interest over time. 

Second, lenders usually offer lower interest rates to those with lower LVRs. 

For example, the average owner-occupied variable rate for someone with an 80% LVR in the Mozo database is 6.83% p.a., compared to 7.10% p.a. for borrowers with a 90% LVR (based on a $400k loan, paying principal and interest, as at 8 April 2024). 

Another big draw of applying for a home loan with a low LVR is you can avoid paying lenders mortgage insurance (LMI). 

LMI is an extra fee you have to pay that protects the lender from financial loss if you default on your home loan. Borrowers with LVRs above 80% typically have to pay LMI. It can be quite expensive, so avoid it if you can.

How to calculate your LVR

The calculation for LVR is simple enough to work out by yourself. To calculate LVR, divide the amount you plan on borrowing by the property value, then multiply that number by 100. 

Loan-to-value ratio formula

LVR = (Loan ÷ Value) x 100

For example:

Let’s say you want to buy a property worth $800,000, and you’ve saved up $150,000 for your initial deposit. Therefore, your loan would be $650,000. 

Take that $650,000 loan and divide it by the $800,000 value to get 0.81. Then, multiply 0.81 by 100 to get your LVR percentage of 81%. 

If your LVR doesn’t quite fall below the maximum 80% threshold to avoid LMI, you might want to increase your initial deposit. In this example, an extra $10,000, taking your deposit to $160,000, will get you over the line. 

Who decides the ‘value’ for your LVR?

It’s important to note that your lender usually decides the ‘value’ figure in a loan-to-value ratio, not the market. 

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 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. 

Say the market valuation of the property you intend to buy is $800,000, but your lender values it at $750,000. 

In this case, having your $150,000 deposit ready to go, and a bank valuation of $750,000, will put your LVR at exactly 80%. 

Your lender will usually go with its own valuation, so keep in mind that what the agent says and what your lender says can differ. If your lender approves your loan at a value below the property’s market value, then you may have to negotiate with the seller to get the price down.

What if your LVR is above 80%?

If you find your LVR is above 80%, don’t fret. You have the option of taking out lenders mortgage insurance (LMI) and choosing a low-deposit home loan

Usually, the most any lender will let you borrow is 95%. However, expect them to heavily scrutinise your finances, due to the extra risk. 

If you’re borrowing more than 80% of a property’s value, you’ll want to ensure that your finances are in tip-top shape, including: 

  • Paying off credit card debt 
  • Paying off personal or student loans
  • Reducing your expenses 
  • Increasing your income.

Average variable interest rates for LVR tiers 2024

Looking at the average variable interest rates across LVR tiers in the Mozo database, lower LVRs typically result in lower interest rates. 

Correct as of 8 April 2024, for a $400,000, owner-occupied home loan, paying principal and interest. 

  • 60% LVR | 6.75% p.a. 
  • 70% LVR | 6.79% p.a. 
  • 80% LVR | 6.83% p.a.
  • 90% LVR | 7.10% p.a.
  • 95% LVR | 7.37% p.a.

However, these are just averages and are more useful as a benchmark for when you compare home loans.

For more homebuying tips, check out our home loan guides for everything from how to save interest on your home loan repayments, to how to calculate your borrowing power

Does LVR include stamp duty?

Up-front costs, such as stamp duty and conveyancing, are not included in your total loan. Therefore, these one-off costs do not count when your LVR is calculated. 

How can I decrease my LVR?

Your LVR reflects the amount borrowed as a percentage of the value of the property you’re buying, so if you want to lower your LVR, you can do so by saving up a larger deposit, or by looking at cheaper properties.

Alternatively, you can lower your LVR by using a guarantor. Guarantors are usually family members who agree to put up their home as security on your loan. Importantly, a guarantor doesn't have to use their property as collateral for the entire loan - only the portion you need to reduce your LVR to 80% may be required.  

How does the bank value my property?

If you’re buying a property, refinancing or accessing the equity in your home, your bank will insist on conducting a property valuation. This is so the bank can be confident that if you’re unable to pay back the loan, they can sell the property and recover the amount owed.

The valuation itself isn’t usually done by the bank. Instead, it’s outsourced to an independent valuer, who might inspect the property in person and produce a report based on the location, size and condition of the building.

Others might rely on less time-consuming methods to appraise your property, such as a desktop valuation (comparing data from similar sales) or a restricted assessment (inspecting the property from the street).

Keep in mind that a bank’s valuation is not the same as the market valuation. The former is done for credit assessment purposes, and tends to be much more conservative than the amount the market might deem your property worth when listed.

How is LVR calculated when refinancing?

If you’re refinancing your mortgage, your LVR will look a little different compared to when you first took out a loan. For starters, depending on how far into the loan you are, the outstanding balance will have decreased. On top of that, your property’s current market value might have changed since you bought it. All of this can amount to a different LVR.

What does 80% LVR mean?

80% LVR means you borrow, in the form of a home loan, 80% of the value of a property. 

In other words, you've paid 20% of the cost of the home (either as a deposit or through repayments), and you still owe the lender 80% of the cost of the home. 

An 80% LVR is considered good by a lender. Anything over 80% is considered more risky by lenders. 

What does 60% LVR mean?

If you have 60% LVR, it means you owe your lender 60% of the value of a home. You could also say you've got 40% equity in the property.

This is a very good LVR to have and may help you access lower interest rates as a result. 

Jack Dona
Jack Dona
Money writer

Jack is RG146 Generic Knowledge certified, with a Bachelor of Communications in Creative Writing from UTS, and uses his creative flair to cut through the financial jargon and make home loans, insurance and banking interesting. His reader-first approach to creating content and his passion for financial literacy means he always looks for innovative ways to explain personal finance. Jack's research and explanations have been featured in government publications, and his work is regularly featured alongside major publications in Google's Top Stories for Insurance.