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  • Writer's pictureColin Green

Loan To Value Ratio: How To Calculate LVR

If you’re in the market for a home loan it is likely that you will be hearing quite a lot of jargon bandied about. It can be very confusing, particularly for first home buyers, when you hear so many new terms, abbreviations and acronyms used. We’re previously taken a look at LMI in a previous blog so we’ve decided to turn our attention to another commonly used term in the world of home buying: loan to value ratio, which is commonly abbreviated to LVR. So what is LVR, why is it important for home buyers to understand and how is LVR calculated? Let’s take a look…

What Is LVR?

So LVR stands for ‘loan to value ratio’ and is basically a financial term used by lenders to describe how much you’ll need to borrow to buy a particular property. It shows the ratio, expressed as a percentage, of the value of the property you’re looking to buy to the size of the loan you’re looking to borrow. It is commonly used in mortgage lending to determine the risk associated with lending a particular amount of money to a borrower.

reviewing properties and calculating loan to value ratio (lvr)

You might also see the term ‘lender assessed value’ used in relation to loan to value ratio. Essentially this means how much the bank or financial institution you’re looking to get the loan from, has valued the property at. This may be different to the advertised price of the property.

LVR is a key metric when it comes to home loans as it is used to determine the perceived risk for the lender. If the loan requested represents a high proportion of the property’s overall value, this will result in a high LVR and may be deemed a higher risk by the lender. However if the value of the property significantly exceeds the value of the loan, the LVR will be lower and the loan will likely be seen as a lower risk for the lender.

Loan to Value Ratio is important as it may affect your borrowing power. The lower the LVR the better this will be for you, the borrower as you’ll be seen as a lower risk by leaders AND you may avoid paying Lenders Mortgage Insurance (LMI).

How To Work Out LVR

Let’s take a more detailed look at the loan to value ratio calculation. It’s really quite simple. You’ll need to know:

  • The lender’s assessed value of the property

  • How much deposit you have available and

  • The amount you wish to borrow (or the current loan amount if you’re refinancing)

So say, for example, the property you’re looking to buy has been valued by the lender at $800,000 and you have a deposit of $100,000 available, you effectively need to borrow $700,000.

Your LVR would be: $700,000 / $800,000 x 100 = 87.5%

Let’s take another example: the bank has valued the property you want to buy at $650,000 and you’ve saved a deposit of $175,000 so the total loan amount you’re looking for is $650k minus $175k = $475,000.

$475,000 / $650,000 x 100 gives you an LVR of 73%.

Essentially, the bigger your deposit, the lower your LVR will be.

When calculating how much deposit you will have, it’s important to take into account some of the other upfront costs such as Lender’s Mortgage Insurance (LMI) Stamp Duty and other legal fees.

What Is A ‘Good’ Loan To Value Ratio?

80% or Below: An LVR of 80% or below is generally considered good. This means the borrower is contributing at least 20% of the property's value as a deposit. Loans with this LVR often attract better interest rates and do not require Lenders Mortgage Insurance (LMI).

Generally a LVR of 80% or lower is perceived as lower risk and is therefore considered favourably by the lending institutions.

High-Risk Loan to Value Ratio (LVR):

  • Above 80%: An LVR above 80% is considered higher risk for lenders. At this level, the borrower has less equity in the property, and the lender is taking on more risk.

    • Between 80% and 90%: Borrowers may still get approved, but they will likely need to pay for LMI to protect the lender in case of default.

    • Above 90%: This is considered high risk. Loans at this LVR often come with higher interest rates, stricter lending criteria, and compulsory LMI. Lenders may be more hesitant to approve these loans, especially if the borrower does not have a strong financial position.

Other Factors Influencing LVR Decisions:

  • Credit History: A strong credit history can help mitigate the perceived risk of a higher LVR.

  • Income Stability: Borrowers with stable and high incomes might find it easier to get approval for higher LVR loans.

  • Property Type and Location: Some properties or locations may be considered higher risk, impacting the LVR a lender is willing to accept.

  • Occupation: Medical professionals, nurses, lawyers, accountants and other professional services are considered lower risk professions. These are viewed favourably by lenders and can potentially result in a higher LVR without any lenders mortgage insurance

Why Is Your Loan To Value Ratio (LVR) Important?

Your LVR can influence a few different aspects of your home loan.

Will You Have To Pay Lender Mortgage Insurance?

When your LVR is greater than 80% you will generally be liable to pay Lenders Mortgage Insurance (LMI) as you are perceived to be a greater risk for lenders.

Interest Rates

Your LVR may influence the interest rates you’re offered by the lending institution. Borrowers with lower LTV ratios often qualify for better interest rates. Conversely the more risk the lender feels they are taking on, the greater the return they may feel they need and the interest rate offered may reflect this.

Loan Approval

High LTV ratios may require additional scrutiny and might result in higher mortgage insurance premiums or stricter approval criteria. This might include higher credit score requirements, more stringent income verification and a thorough review of your financial history. Some banks draw the line at a 95% LVR however, it definitely depends on your circumstances. It pays to work with a home loan broker to help you shop around and understand the products available.

As we’ve highlighted, LVR is a key metric when it comes to home buying so it pays to understand it. Working with an expert mortgage broker can help take the stress out of choosing which lenders to approach and finding the right products with the terms and rates that suit your personal circumstances. The experienced home loan experts from CJG Finance can help you navigate the process.

To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him:


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