What is Loan-to-Value Ratio (LVR)?
What is LVR?
Here’s everything you need to know about a loan to value ratio (LVR), from its meaning to how it affects your mortgage:
What is LVR (loan to value ratio)?
The loan to value ratio, also known as LVR, is the amount you’re borrowing compared to the value of the property shown as a percentage. The more you borrow on your home loan, the higher your LVR will be.
Lenders use LVR to assess the risk of a loan. The higher the LVR percentage, the higher the risk the loan is to the lender, and vice versa. Having a low LVR can often give you a better chance at loan approval with better terms. If you put down a sizable down payment, your LVR will be much lower.
How do I calculate my LVR?
You can figure out your LVR by dividing the loan amount by the property’s value then multiplying by 100 to get the percentage.
For example, if you’re taking out a $450,000 mortgage to buy a property with a purchase price of $500,000, you’ll have an LVR of 90%. In a formula, it would look something like this:
$450,000 (home loan amount) ÷ $500,000 (property or purchase price) x 100 = 90%
You can also use an online LVR calculator for a quick and easy way to compute your LVR.
Take note, upfront costs and ongoing fees are not included when calculating the LVR but they do affect the overall cost of your home loan.
Lender’s property valuation can affect your LVR
Lenders conduct their own formal property valuation before approving any home loan application. A professional valuer performs the valuation which could differ from the market valuation made by a real estate agent or the seller.
What is a good LVR for a mortgage?
Home loans with an LVR of 80% or less are considered good. Usually, a 60% LVR or even lower can get borrowers a better deal on your mortgage because there’s less risk for the lender.
An LVR higher than 80% would require borrowers to take out a Lenders Mortgage Insurance (LMI). The insurance protects the lender in case you default on your loan repayments. The LMI typically costs around 2% of the value of the loan.
Advantages of having a low LVR
Aside from not paying LMI and getting a better chance at mortgage approval, having a low LVR also offers borrowers benefits such as:
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Lower your repayments. By borrowing less, you can reduce your repayments and make it more manageable.
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Build equity. Home equity refers to the value of what you own in your home. With a low LVR, you can build home equity more quickly because you own more from the start.
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Reduce the cost of the loan. Minimising the principal loan amount will help reduce the interest paid over the life of the loan which can save you thousands in the long run.
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Get better rates and features. With a low LVR, lenders may be more amenable to providing your lower interest rates and offer access to useful loan features that can help you pay off your mortgage quicker.
How can I keep my LVR low?
As you can see, there are plenty of benefits to having a low LVR. If you want to reduce your LVR, try using one of the following strategies:
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Build your deposit. If you have a sizable deposit, you borrow less from the lender. This lowers your LVR and improves your chances of approval and getting a better deal on your mortgage. With a big enough down payment, you can skip paying for LMI, as well.
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Buy a less expensive home. Opting for a less expensive home can make it easier on your finances. You don’t strain too far or overextend your resources to afford a home that could be out of your budget.
Is there a maximum LVR to get a home loan?
Lenders have certain conditions that affect how much you’re allowed to borrow. Some approve home loans with a 90% LVR or higher, however, they often come with stringent guidelines and stricter loan terms.
The maximum LVR can change depending on factors such as home loan amount, property, type of loan, and the borrower’s credit score and financial background.
Generally, borrowers who provide sufficient income evidence could borrow a home loan between 80% to 90% LVR based on the strength of their application. Some lenders may also ask for a guarantor if the borrower has a high LVR.
Learn more about LVR and your mortgage options
If you’d like to know about your LVR and home loan options, get in touch with the lending specialists at loans.com.au. You can also reach us by calling 13 10 90. Our friendly lending specialists are here to help you figure out the best home loan solution with an LVR that works best for you.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
