Understanding the loan to value ratio (LVR)

What is loan to value ratio (LVR)?

The loan to value ratio is the amount you're borrowing, represented as a percentage of the value of the property you’re buying. The bigger your deposit, the lower the LVR will be.

Impact of LVR on your home loan

Lenders place a large emphasis on LVR when assessing your loan application. The lower the LVR, the lower the risk to the bank. Generally, loans with a LVR over 80% of the property value are considered higher risk. To mitigate this risk, you’re charged Lenders Mortgage Insurance (LMI), which protects the lender in case you can’t repay the loan. However, if you manage to keep your LVR below 80%, you can get an LMI exemption and avoid this additional expense.

The LVR that banks will allow you to borrow depends on the home loan amount you need, the location of your property, your credit history, your income and employment history and the type of loan you’re applying for.

How to calculate your LVR?

The LVR is calculated by dividing the loan amount by the property's value or purchase price, and then multiplying by 100 to get a percentage. 

For example, let’s say that you’d like to borrow $450 000 and the property price is $600 000.

The LVR of the home loan would be calculated like this:

($450 000 loan ÷ $600 000 property value) x 100 = 75% LVR

How is the property value assessed when calculating the LVR?

Typically, there are two main types of valuations: market valuation and bank valuation. A market valuation is simply the price your property would likely sell for in the current market. This is determined by real estate agents based on similar property sales in the area. A bank valuation, on the other hand, is one conducted by professional valuers hired by the bank. This valuation assesses the property’s quick-sale value while considering factors that protect the lender’s risk.

If the market valuation is different to the bank valuation, then the lender will generally use the lower of the two to determine the LVR.

What’s not included in the loan amount when calculating LVR?

It’s important to remember that upfront costs such as conveyancing and stamp duty aren’t included in the loan amount for LVR calculations.

Ways to lower your LVR

• Save a larger deposit: This is fairly straightforward. The more you save, the less you’ll need to borrow.
• Negotiate with lenders: There’s a chance some lenders are willing to reassess your property if the market conditions have improved.
• Opt for a less expensive property: Look for properties with a lower purchase price that don’t need you to overextend your finances. This will mean you’ll have a bigger deposit and a lower LVR.
• Get help from family: Your parents could act as a guarantor and use their property as security. This will mean you can borrow a smaller deposit for the loan, avoid LMI and have a lower LVR.