What Does LVR Mean? Loan to Value Ratio Explained

LVR meaning: what loan to value ratio is and how to calculate it

LVR stands for loan to value ratio (some lenders say loan to valuation ratio): the amount you borrow, shown as a percentage of the property’s value. To calculate it, divide the loan amount by the property value and multiply by 100, so a $600,000 loan on a $750,000 home is an 80% LVR.

That one number decides a lot. It tells a lender whether you pay lenders mortgage insurance (LMI), which pricing band your rate comes from, how many lenders will look at the loan at all, and how much equity you can release later. If you only want the figure, our LVR calculator does the sum for you. This guide covers what the figure means once you have it.

How to calculate your LVR

The formula is the same for a purchase, a refinance or an investment loan:

LVR = loan amount ÷ property value × 100

Take a $750,000 purchase with a $150,000 deposit. The loan is $600,000, and $600,000 ÷ $750,000 × 100 = 80%. Your deposit is the other side of the same number: a 20% deposit means an 80% LVR.

Three details change the answer in practice:

1. Split loans count as one. If you split the loan into a $450,000 variable portion and a $150,000 fixed portion, the lender adds them together. $600,000 on a $750,000 property is still 80%.
2. Capitalised LMI raises the LVR. When the insurance premium is added to the loan, it becomes part of the loan amount. On a $750,000 property, every $7,500 of capitalised premium adds 1% to your LVR.
3. Purchase costs sit outside the calculation. Stamp duty, legal fees and other buying costs aren’t financed on a standard purchase. You need savings for them on top of the deposit, even if the loan itself goes to the lender’s maximum LVR.

Valuation or purchase price: which one does the lender use?

When you buy, lenders lend on the lower of the purchase price and their own valuation. On most established homes the two match. When the valuation comes in lower, the lower figure wins and your LVR rises.

Using the example above, say the lender’s valuer puts the home at $720,000 instead of $750,000. The same $600,000 loan is now 83.3% of the value, which is over the LMI threshold. To stay at 80% you could only borrow $576,000, so you’d need another $24,000 in cash to settle without LMI. It happens most often on new and off-the-plan property, where the price can include a premium the valuer won’t pay, and in falling markets.

Valuations also differ between lenders on the same property. On one refinance we worked on, two lenders’ valuations on the same house were about $100,000 apart, and at the lower figure the loan would have needed LMI. That is why we often order valuations from more than one lender before choosing where to apply. Our guide to how bank property valuations work explains what the valuer looks at.

How lenders use your LVR

LMI above 80%

Lenders mortgage insurance protects the lender, not you, if a loan goes bad and the property sells for less than the debt. It usually applies once your LVR goes above 80%, which is why Moneysmart’s guide to buying a house sets a 20% deposit as the savings goal that avoids it.

Going over 80% doesn’t always mean paying LMI. Several lenders waive it for eligible borrowers in selected professions, usually up to 85% or 90% LVR, and a doctor may be able to borrow 95% with no premium at all. Our LMI waiver guide covers who qualifies. First home buyers may also be eligible for the Australian Government 5% Deposit Scheme. It lets eligible buyers purchase with a 5% deposit (2% for eligible single parents and legal guardians) without paying LMI, subject to the scheme’s price caps and conditions.

Pricing tiers

Many lenders price home loans in LVR bands, so the same borrower can be offered a different rate at 79% than at 81%. The breakpoints differ between lenders. Common ones sit at 60%, 70%, 80% and 90%. At several lenders the deepest discounts only switch on at or under 70%.

A single dollar can move you from one band to the next. A buyer we worked with needed to borrow just over 90% of the purchase price after a successful auction. We trimmed the loan so it landed at 89.99% LVR, which kept it in the cheaper 80% to 90% band for the life of the loan instead of the band above it. We check where a loan sits against the nearest breakpoint before the amount is locked in, not after.

The 95% ceiling and the exceptions

For most borrowers, 95% is the highest LVR available. How that 95% is measured matters:

• Some lenders lend up to 95% of the purchase price and add the full LMI premium on top.
• Others cap the total loan, premium included, at 95%. At high LVR the premium is large, so the base loan ends up lower. On one recent scenario at a lender that works this way, the base loan couldn’t go past about 91% of the price.
• Very rarely, a few lenders go to 97% or 98% with the premium included, depending on the loan amount. Borrowers still need a deposit of around 6% to 7%, plus stamp duty and legal costs.
• The main exception is a family guarantee, where some lenders will lend 100% of the price plus purchase costs, stamp duty included.

Above 90% the rules tighten again. Most lenders apply a genuine savings test once the LVR goes over 90% (measured before capitalised LMI), and two lenders apply it above 85%. That usually means showing savings you’ve held for three months, although a number of lenders accept a rental ledger from a licensed agent in its place.

Policy changes above 80%

The 80% line is a policy line as well as an insurance line. Once a loan needs LMI, the lender’s appetite changes with it. A new job is a good example: nearly every lender on our panel accepts an applicant on probation at or below 80%, many of them once you have 12 months in the same industry, but above 80% several add further conditions and a couple cap those applicants at 80%. One self-employed client we worked with lost roughly $100,000 of borrowing capacity by going over 80%, because at that lender crossing the line switched the income test from his latest year to a two-year average. When a loan sits close to 80%, the question to ask is what the lender changes once you cross it, not only what the LMI costs.

Guarantor loans

A family guarantee lowers the LVR the lender cares about by adding a second property as security. Say you’re buying at $750,000 with a $37,500 deposit and borrowing $712,500 (95%). Your parents guarantee the part of the loan above 80%, which is $112,500, using the equity in their home. The lender then treats the loan as fully secured at or under 80%, so there’s no LMI and you get sub-80% pricing.

At least one lender caps the guarantee at 20% of the loan, which limits what the guarantor is exposed to, and several want the guarantor to get legal advice from their own solicitor before signing. Only some lenders offer family guarantees, so the structure narrows the choice of lenders. Our guarantor home loans page explains how they work.

What changes at each LVR band

This is a general guide to what typically changes as the LVR rises. Individual lenders draw the lines in different places, and the property, the loan purpose and your income all affect the outcome.

LVR when you refinance

There is no purchase price on a refinance, so the new lender works out your LVR from its own valuation of the property today. If you owe $520,000 and the new lender values the home at $680,000, your LVR is 76.5%. If it values the home at $640,000 instead, the same loan is 81.25%, and you’re back in LMI territory. Moneysmart’s switching guide makes the same point: with less than 20% equity you may have to pay LMI again, which can wipe out the rate saving.

That’s why a high-LVR purchase tends to keep you with your first lender for a while. Borrow at around 91% and you’re effectively tied to that lender until your equity grows past 80%. Buyers are often surprised by this, so plan for it before you settle.

Below 80%, refinancing gets easier. A handful of lenders offer a streamlined like-for-like refinance, with a lower assessment buffer, when the LVR is 80% or less, there is no cash-out and your repayment history is clean. If you want to release equity, lenders generally work to 80% of the valuation. At $680,000, 80% is $544,000, so up to $24,000 could be available on the $520,000 loan above, before costs and subject to the lender being satisfied you can repay it. Around 20 lenders on our panel will release cash above 80% with LMI, to about 90%, for a non-structural renovation. See our refinancing page for how we compare the options.

LVR on investment loans

The formula doesn’t change for an investment property, but the limits often do. On a standard property, most lenders go to 95% for an owner-occupier but cap investment loans at 90%, although some lenders will go to 95% on an investment property with the LMI premium included. LVR can also affect how much of the rent a lender counts: one lender counts 90% of the rent at 70% LVR or less and 85% between 70% and 80%.

Many investors don’t use cash for the deposit at all. They use equity in their home. A structure we use regularly is an 80% loan against the new property plus a separate loan against the existing home for the 20% deposit and costs. Say your home is worth $900,000 and you owe $500,000. To buy a $700,000 investment property, you borrow $560,000 against it (80%) and around $175,000 against your home for the $140,000 deposit and roughly $35,000 of duty and costs. Your home loan rises to $675,000, which is 75% of $900,000, so both properties stay at or under 80% and neither loan needs LMI. The loans stay separate, and so does the security.

How to lower your LVR

• Save a larger deposit. It’s the plain answer, and sometimes a small amount does a lot. A couple buying in the Canberra region at around $1 million sat just over 90%. Saving another $5,000 to $6,000 and buying at about $995,000 brought them back to 90%, which opened a much wider set of lenders at a better rate.
• Land under a breakpoint. Before you fix the loan amount, check how close it sits to 80%, 90% or the lender’s pricing tiers. A small change in the loan can move you into a cheaper band.
• Use a family guarantee. A guarantor’s property covers the shortfall above 80%, so you avoid LMI and get sub-80% pricing without a bigger deposit.
• Pay the loan down and let time work. Extra repayments lower the loan, and any rise in value lowers the LVR further when a lender next values the property.
• Get more than one valuation. On a refinance, valuations from different lenders can be tens of thousands of dollars apart on the same home. A higher valuation can take you under 80% or into a better pricing tier.
• Rebalance debt across properties. If you own more than one property, moving debt from one security to another can bring the tighter one under a threshold. One investor we worked with had a large loan sitting right on 70% while his second property sat near 50%. Rebalancing the debt pulled the larger loan under 70% and into the better tier.

A government scheme or an LMI waiver doesn’t lower your LVR. It removes the cost of a high one, which is often the better result for a buyer who would otherwise spend years saving.

Frequently asked questions

What does LVR mean?

LVR means loan to value ratio. It is the size of your home loan shown as a percentage of the property’s value. A $600,000 loan on a $750,000 property is an 80% LVR. Lenders use it to measure their risk and to decide whether LMI applies, what rate you’re offered and how much they’ll lend.

How do you calculate LVR?

Divide the loan amount by the property value and multiply by 100. If you’re borrowing $675,000 to buy a $750,000 home, $675,000 ÷ $750,000 × 100 = 90%. If you have split loans, add them together first. If LMI is added to the loan, include the premium in the loan amount.

What is a good LVR?

80% or less is the usual benchmark, because it avoids LMI at most lenders and gives you the widest choice of loans. Many lenders offer sharper pricing again at or under 70% or 60%. A lower LVR isn’t always the right goal, though. Keeping a cash buffer after settlement can matter more than getting from 78% to 75%.

How do you calculate LVR for a refinance?

Divide your new loan amount, including any cash-out, by the new lender’s valuation of the property today. The price you originally paid doesn’t matter. If you owe $520,000 and the lender values the home at $680,000, your LVR is 76.5%. If the valuation is lower than you expect, the LVR can go over 80% and LMI can apply again.

What does 80% LVR mean?

It means you’re borrowing 80% of the property’s value and contributing a 20% deposit or holding 20% equity. It’s the point at which most lenders stop requiring LMI, and it’s often a pricing breakpoint too.

What does 95% LVR mean?

It means you’re borrowing 95% of the value with a 5% deposit. It’s the maximum for most borrowers. Expect LMI unless you’re eligible for a waiver or the 5% Deposit Scheme, a genuine savings test at most lenders, and a smaller choice of lenders. Some lenders count the LMI premium inside the 95%, which lowers the base loan.

What is the difference between LVR and LMI?

LVR is a measurement: your loan as a percentage of the property’s value. LMI is an insurance premium that protects the lender, not you, and it usually applies when the LVR goes above 80%. A lower LVR reduces or removes the LMI cost.

Is LVR based on the purchase price or the valuation?

When you buy, lenders use the lower of the two. If the valuation comes in below the price, your LVR rises and you may need more cash to avoid LMI. On a refinance there is no purchase price, so the lender uses its valuation.

Talk to us about your LVR

We compare 52+ lenders, and the LVR is usually where the options start to separate: which lenders price your band well, which ones change their policy above 80%, and whether a waiver, guarantee or scheme takes LMI off the table. If you’re buying, refinancing or releasing equity, speak to us and we’ll work out where your loan sits and which lenders fit it.

This article contains general information only and does not constitute financial advice. Your personal financial situation, objectives and needs have not been considered. Before acting on any information, you should consider its appropriateness to your circumstances. Speak to a qualified mortgage broker for advice tailored to your situation. Mortgage World Australia Pty Ltd is a credit representative (CR No. 396946) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).

Patrick O'Brien

Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick’s qualifications include:

Bachelor of Business, UTS Sydney. Majored in accounting and sub-majored in Finance and Marketing.
Diploma of Finance and Mortgage Broking Management FNS50310
Certificate IV in Financial Services (Finance/Mortgage Broking) FNS40804