Buying a home in Australia is a major financial decision so it's important to have some understanding of the considerable jargon surrounding a home purchase. One frequently encountered home loan term is LVR, or loan-to-value ratio.

What is Loan to Value Ratio (LVR)?

Simply put, LVR is the percentage of your property's value you borrow through your home loan. In other words, it compares your deposit to the value of the loan needed.

Lenders will consider LVR when assessing home loan applications. The higher the LVR (or the smaller your deposit as a portion of your purchase), the more potential risk you represent to a lender. As a result, higher LVR loans may also attract higher interest rates.

How to calculate LVR

Here's what you need to know before you calculate your loan-to-value ratio:

Loan amount

This is the amount you're borrowing to purchase the property.

Property value

This is the market value of the property you're interested in buying. You can obtain this through a formal valuation or use online estimates as a starting point.

See also: Bank valuations vs market value: what's the difference

And here's how you work out your LVR:

1. Do the math:

Divide your loan amount by the property value. For example, if your loan amount is $600,000 and the property value is $750,000, the equation would be:

$600,000 (loan amount) / $750,000 (property value) = 0.8

2. Express it as a percentage:

Multiply the result by 100 to express your LVR as a percentage. In this example:

0.8 x 100 - 80%

So, your LVR for this scenario would be 80%.

What is a good LVR?

A lower LVR is considered better for both you and the lender. Here's a breakdown:

LVR below 80%

This is deemed ideal, often leading to lower interest rates and potentially avoiding Lenders Mortgage Insurance (LMI).

LVR between 80% and 95%

Lenders might still offer competitive rates, but LMI typically applies, adding to your loan costs.

LVR above 95%

Such high LVRs are rare and usually require special loan products with potentially higher interest rates and mandatory LMI.

How does LVR affect your interest rate?

Your LVR plays a significant role in determining the interest rate you'll be offered on your home loan. Think of it as a gauge of risk for the lender: the higher your LVR, the more money you're borrowing compared to your own contribution. This raises lenders' concerns about potential losses if you default on repaying your loan.

Let's consider the scenarios:

Lower LVR, lower rates

  • Reduced risk

A lower LVR means less risk for the lender, as the property value serves as a larger buffer against potential losses in the case of default. This incentivises lenders to offer lower interest rates, potentially saving you thousands of dollars over a loan term.

  • Attractive deals

Many lenders have tiered interest rates based on LVR ranges. The lower your LVR falls the better the rate you'll qualify for.

Higher LVR, higher rates

  • Increased risk

Conversely, a higher LVR presents greater risk for the lender. To compensate for this increased risk, it might charge you a higher interest rate. This can significantly impact your monthly repayments and overall loan cost.

  • Limited options

Many lenders may restrict high LVR borrowers from accessing their most competitive loan products, and some don't even lend to borrowers with LVRs above a certain level.

The sweet spot

Generally, an LVR below 80% is considered the golden zone for securing the most competitive interest rates. This is because most lenders won't charge Lenders Mortgage Insurance (LMI) on loans with an LVR of 80% or less. This insurance protects the lender if you default but comes at considerable additional cost.

How can LVR affect your LMI cost?

LMI effectively acts as a safety net for your lender should you default on your home loan. Generally, LMI applies when your LVR exceeds 80%. The LMI cost is calculated based on your loan amount, LVR, and other factors.

The exact LMI cost depends on a few factors:

  • Loan amount: The larger the loan, the higher the LMI premium.

  • LVR: As mentioned above, a higher LVR translates to a proportionally higher LMI cost. Some lenders might have tiered pricing based on specific LVR ranges.

  • Property type: Investment properties typically incur higher LMI premiums than owner-occupied ones.

  • Lender and LMI provider: Different lenders and LMI providers may have varying pricing structures.

For guide as to how much your LMI could be, use our lenders mortgage insurance calculator.

How Can You Reduce Your LVR?

To achieve a lower LVR and potentially secure better loan terms, there are a few strategies to consider:

Increasing your deposit

Saving more upfront lowers your loan amount, reducing your LVR. This might seem obvious, but diligently prioritising saving a larger deposit is the most direct way to lower your LVR. Analyse your budget, cut unnecessary expenses, and consider temporary side hustles to accelerate your savings goals. Reassess your finances and consider putting any existing savings accounts, inheritances, bonuses, or tax returns towards your deposit.

See also: How much do you need for a house deposit?

Exploring government first-home buyer schemes

Many Australian states and territories offer first-home buyer grants and schemes that can significantly impact your LVR. Deposit grants provide financial assistance towards your deposit, effectively reducing your loan amount and lowering your LVR. Some government programs offer loan guarantees, allowing you to purchase a home with a smaller deposit (lower LVR) without LMI.

Purchasing a less expensive property

This strategy allows you to maintain a lower LVR even with your existing deposit. While your dream home might be in a pricey suburb, consider exploring more affordable areas where your existing deposit translates to a lower LVR. Apartments or duplexes also generally have lower price tags compared to detached houses, potentially allowing you to achieve a lower LVR with your current savings.

See also: Types of Properties & Houses

Is there such thing as a 100% LVR home loans?

In Australia, traditional lenders rarely offer 100% LVR loans due to the high risk involved. However, some government-backed schemes or niche lenders might offer options with very high LVRs, often with stricter eligibility criteria and potentially higher loan costs.

See also: Can you buy a home without a deposit?

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