Understanding Loan-To-Value Ratio (LVR) in home loans

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As a hopeful homebuyer, you will come across many new phrases in your home loan journey. One of these will be Loan-To-Value Ratio (LVR). If you’ve never heard of LVR and feel unsure about how this fits into your home loan process, rest assured that our below guide will educate and empower you.

What is Loan-To-Value Ratio?

When you begin your home-buying journey, one of the most critical factors you’ll need to address is the required deposit. It’s common knowledge that most lenders require a 20% deposit before they will approve your home loan. While you could be forgiven for thinking this figure is set at random, it is actually based on what is known as the Loan-to-Value Ratio (LVR). In this context, the LVR is simply the home loan amount divided by the value of your property.

How is LVR Calculated?

The deposit size and property value play a major role in how LVR is calculated.

What is a 'Good' LVR?

A good LVR in Australia can be anywhere under 80%. An LVR under 80% is a low risk, and there will be no LMI (Lenders Mortgage Insurance) needed. An LVR of 80-90% is of a moderate risk, and LMI may be necessary. Anything over 90% is a high risk, meaning higher rates and a tighter chance of approval.

LVR and Refinancing - Can it Improve Over Time?

An LVR can improve over time and there are a multiple ways in which it can do so. One of the key ways is lowering your loan balance which can increase equity. Another way an LVR can improve is market growth, and/or refinancing when your LVR improves which can reduce costs.

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How does LVR Impact my Home Loan Process?

So how does this ratio actually impact your home loan process? LVR is an important measure for lenders, and the outcome of your ratio can affect certain aspects of your home loan application outcome.

Interest rates

It is common for lenders to offer lower interest rates to applicants with lower (or better) LVRs. This is because a lower Loan-To-Value Ratio implies less risk for the lender.

Lenders Mortgage Insurance

In Australia, if your LVR is higher than 80%, you will need to take out Lenders Mortgage Insurance (LMI). LMI is insurance that protects the lender, in case you default on the mortgage payments.

Loan approval

Your Loan-To-Value Ratio can influence your likelihood of securing a mortgage. Having a higher LVR will encourage lenders to be more weary of your financial situation, which may reduce their confidence in lending to you.

FAQ

What is a good LVR in Australia?

An LVR under 80% is great in Australia.

Can I get a loan with a 90% or 95% in Australia?

It is possible to get a loan with a 90-95% LVR in Australia, however this may attract higher interest rates and there is stricter eligibility criteria.

How do I Calculate my LVR?

Essentially, this is calculated with the loan amount divided by the property value x100.

For example, If you’re buying a $700,000 property and have saved $140,000, you’ll need a $560,000 loan. Your LVR would be 80% (560,000 ÷ 700,000).

Does LVR Affect my Interest Rate?

Your LVR does affect your interest rates.

80% and under LVR will experience lower interest rates.
80%-90% LVR will have slightly higher interest rates and usually will require a LMI.
90%-95% LVR will have high interest rates and will almost always require a LMI.

What happens if my LVR is above 80%

If you LVR is above 80% you will likely have moderate-high interest rates and require a LMI.

Is LVR the Same as Equity?

LVR is not the same as equity. LVR is the ratio (or percentage) of the amount you’ve borrowed compared to the total value of the property. Equity, on the other hand, is the portion of the property you own outright. For example, if you’ve paid off 35% of your loan, your equity in the property is 35%, and your LVR is 65%.

How do I improve my LVR Over Time?

You can improve your LVR by paying off your loan faster, if the property value increases (for example, renovations or market appreciation), and by refinancing.

At Borro, we’re here to support your property journey, wherever that may take you. To discuss how we can help get you the perfect loan for your perfect home, book an appointment with one of our Borro brokers today or call the team on 1300 1BORRO