The purchase of a house is possibly one of the most financially significant things you will do in life, and knowing about the loan-to-value ratio (LVR) can help you make informed decisions about loans. Regardless of whether you are a first-time homebuyer, moving into a bigger house, or refinancing your current loan, the loan-to-value ratio is a key factor that determines your ability to borrow money, your interest rates, and any other extra costs such as lender’s Mortgage Insurance (LMI).
While many homeowners in Australia are only concerned about interest rates and loan terms, the LVR is also a significant consideration for you. In this article, we will discuss everything about what LVR is, how it is calculated, why it matters, and how you can improve it before applying.
The loan-to-value ratio (LVR) is the ratio between the total loan taken from a lender and the value of the property used to secure the loan. The ratio compares your loan amount with the property value.
To calculate LVR, the formula is simple: LVR = (Loan Amount ÷ Property Value) × 100
For example,
| Property Value | $800,000 |
| Home Loan Amount | $640,000 |
| Deposit Amount | $160,000 |
LVR = $640,000 ÷ $800,000 × 100 = 80%
This means your LVR percentage is 80%
In this case, the borrower has an LVR of 80%, which means that he is getting 80% of the value of the property as a loan, while 20% of the money comes from him in the form of a deposit.
The lower your LVR, the less financial risk you present to the lender.
The loan-to-value ratio is among the first things that any financial lender will check when evaluating a home loan application. It helps lenders assess how much financial risk they take when approving your loan. A lower LVR may improve your chances of mortgage approval.
The benefits of having a low LVR include the following:
However, a high LVR indicates that the lender is funding a higher percentage of the total worth of the home. This is a risky situation since the lender will incur losses in case the price of properties drops.
There isn’t a single applicable LVR that’s considered ideal for every borrower, as it depends on lenders’ lending criteria and your overall financial situation. However, most Australian lenders generally view an LVR of 80% or lower as favorable. Maintaining an LVR below 80% may improve your chances of loan approval, provide access to more competitive interest rates, and help you avoid paying Lenders Mortgage Insurance (LMI). Ultimately, the right LVR will depend on your financial goals, available deposit, and lender requirements.
| LVR range | LMI required? | Impact |
| Below 80% | No | Best interest rates, wide range of lenders |
| 80%-90% | Usually yes | Moderate LMI costs, still competitive rate options |
| 90%-95% | Yes | Higher LMI costs, fewer lender options |
| Above 95% | Rarely available | Very limited lenders, higher scrutiny |
On average, the best way to ensure you have maximum bargaining power is to keep your LVR under 80 percent, thereby avoiding LMI. However, many people, including first home buyers, have managed to get home loans despite having a higher LVR.
The Lender’s Mortgage Insurance (LMI) is an insurance fee that is paid by borrowers when their LVR is above 80%. Contrary to its name, the LMI is not to protect the borrower; rather, it protects the lender against possible default from the borrower.
Suppose you buy a house at a 10% deposit level; then your LVR is going to be 90%, meaning that your LMI will be applicable. The LMI rate is dependent on several factors, including:
Due to the high cost of LMI (Lender’s Mortgage Insurance), one needs to minimise their LVR before applying for the loan.
The larger home loan deposit will reduce the amount you need to borrow and may help avoid paying LMI. This is the simplest option for improving your LVR before purchasing your home.
Using a family member as a guarantor would help to strengthen your position regarding the down payment without actually requiring any additional savings on your part.
If you already have a home, you can take advantage of its equity to reduce the LVR on an investment or new home purchase.
Eligible first home buyers may also benefit from government initiatives such as the First Home Guarantee, which can allow the purchase of a home with as little as a 5% deposit without paying LMI, subject to eligibility criteria.
The calculation of your LVR after the refinance process is different compared to the time you first bought your property. The lenders consider your remaining loan balance against the current market value of your property rather than the original purchase price of your property.
The formula used for calculating the LVR remains the same as follows:
Outstanding Loan Amount ÷ Current Market Value of Property × 100 = LVR
For instance, if you have an outstanding home loan of $500,000 and the current market value of your property is $700,000, your LVR would come out to be approximately 71.4%.
A low LVR while refinancing can prove to be advantageous for you as well. If there has been a rise in the value of your property or you have already made substantial payments towards your loan amount, you are likely to get better interest rates and may not even need to pay for Lenders Mortgage Insurance (LMI). These are just some of the many benefits of refinancing a home loan, particularly if your financial circumstances have improved over time.
Yes. Many Australian lenders are offering LVR home loans for clients with smaller deposits.
However, loan approval does not depend solely on your LVR. Lenders also consider several other factors, including:
A higher LVR doesn’t automatically mean your home loan application will be rejected. However, it may reduce your lender options, increase borrowing costs, and require you to pay Lenders Mortgage Insurance (LMI).
If your LVR is high, strengthening the other aspects of your financial profile can improve your chances of approval. Consulting an experienced mortgage broker in Sydney can also help you compare lenders and find home loan options that suit borrowers with a higher LVR.
Your Loan-to-Value Ratio stands for much more than just a number or a percentage. The LVR in a home loan influences your borrowing capacity, loan charges, and interest rates, and also determines if you will have to pay for the lender’s mortgage insurance. Knowing everything about your LVR before making a home loan application will enable you to be well-informed financially and also save you thousands of dollars during the term of your loan.
If you’re unsure what your current LVR means or want expert advice on improving your home loan options, the team at Active Mortgage & Finance can help. We’ll assess your financial situation, compare suitable lenders, and guide you towards a home loan solution that supports your long-term property goals.
Lekha Gurung is an experienced mortgage broker from Sydney who specialises in assisting first-home buyers, property investors, refinancing and more. Our services include First Home Buyers Loans, Investment Loans, Refinancing, Personal Loans, Business Loans, Reverse Mortgage assistance in property research, and Insurance referral arrangements.
Additionally, Lekha Gurung offers Free Home Loan Consulting and Home Loan Advice. Recognizing the complexities of the mortgage process, our consultations are available for free to everyone. Lekha will provide expert guidance tailored to your financial needs, ensuring you make the right decisions on your property journey.
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