What is loan to value ratio (LVR)?

If you're looking for a home loan you may have come across the term LVR and wondered about its meaning. Loan to value ratio (LVR) is used to determine how much you are borrowing in relation to the value of your property. A high LVR means your deposit is small. A low LVR means you have a large deposit and are therefore borrowing less.

LVR is like the reverse of a deposit. If you have a loan to value ratio of 80% then your deposit is 20% of the property's value. And you are borrowing the remaining 80%. That's your LVR.

Understanding LVRs helps you compare home loans and find one that matches your deposit size. It can help you avoid applying for a loan that isn't suitable.

What is LVR?

The meaning of LVR, or loan to value ratio, is the value of a property minus the deposit a borrower has saved. Loan to value ratio is expressed as a percentage. If you have an LVR of 80% this means you have a 20% deposit saved and must borrow the remaining amount.

It's a common term in the mortgage industry for determining how much someone can borrow in relation to their deposit size. Every home loan product has a maximum LVR, which indicates to a borrower how big your deposit should be in proportion to the value of the property you are buying.

Simple LVR example

• You purchase a $700,000 property.
• Your deposit is $140,000.
• $140,000 is 20% of $700,000. This means you have an 80% LVR.

Maximum and maximum insured LVRs

Take a look at any home loan in Australia and you will see two loan to value ratios listed alongside details like the interest rate and comparison rate. These are maximum LVR and maximum insured LVR.

The difference comes down to lenders mortgage insurance (LMI). This is a premium lenders charge to borrowers when there are deposits below 20% of a property's value. In other words, when the LVR is higher than 80%.

LMI can cost thousands of dollars, but it does help borrowers buy properties with smaller deposits. And this is why home loans have two LVRs.

The maximum insured loan to value ratio lets borrowers know if the loan is available with a deposit below 20%. The maximum LVR refers to the deposit size you will need without paying lenders mortgage insurance.

The maximum LVR on most Australian loans is 80% or lower. But the maximum insured LVR can be 90% or 95%.

Here are two examples:

• Home Loan A. The loan has a maximum LVR of 80% and maximum insured LVR of 80%. You need a 20% deposit to get this loan and cannot pay LMI to get it with a smaller deposit
• Home Loan B. The loan has a maximum LVR of 80% but the maximum insured LVR is 90%. You can get this loan with a 20% deposit and avoid LMI but you can also get it with a deposit between 19 and 10% of your property's value. You just need to pay LMI as well.

How to calculate your loan to value ratio

Loan to value ratios are simple to calculate. You need two numbers: your property value and your loan amount (or deposit size).

Let's say you are buying a $600,000 property. Your deposit is $100,000, therefore your loan amount is $500,000.

Now you can determine the LVR percentage by dividing the loan amount by the property value. Here's how to calculate it:

• 600,000 - 100,000 = 500,000
• (500,000 ÷ 600,000) x 100 = 83.3% LVR
• Your LVR = 83%

Here are some examples in a table, using different property values and deposit sizes.

Example LVR calculations

How refinancers can calculate their LVR

LVR matters for refinancers too but it's slightly different.

Instead of a deposit, you need to calculate your home equity. This is the value of your property minus your remaining home loan debt. Before you break out the calculator do the following:

• Determine the current value of your property. Don't use the price you paid for the property. Instead, estimate its current market value by looking at recent sales of similar properties in your area. You can get free property valuations through various real estate sites, or pay for a professional valuation.
• Check your remaining loan amount. Log in to your lender's online platform or app and check how much is left on your home loan.

Once you have those two numbers you can work out your equity and determine your current loan to value ratio. Here's an example:

• Your home is worth $800,000.
• You have $400,000 left to repay on your home loan.
• You have $400,000 in equity

And then you can work out your LVR: (400,000 ÷ 800,000) x 100 = 50%.

With an LVR of 50%, a refinancer would likely be eligible for most home loans, given that so many home loans have a maximum LVR of 80%. Provided your income and spending proves you can continue making repayments, you should have no trouble refinancing with such a strong LVR.

A lower loan to value ratio makes it easier to get a home loan

If your LVR is 90% and you apply for a home loan with a maximum insured LVR of 80% your application will be rejected or the lender will recommend a different product. That's why it's important to understand your deposit size.

The lower your LVR, the bigger your deposit is relative to your home loan. This makes it easier to get a home loan. As mentioned above, borrowers with low deposits (that is, deposits under 20%) usually have to pay lenders mortgage insurance.

Compare low deposit home loans with LVRs above 80%

Having a lower LVR and a bigger deposit can make your home loan application easier. Lenders view borrowers with 20% deposits as lower risk prospects. If you are applying for a home loan with just a 5% deposit a lender may look more closely at your income, debts and expenses or ask you for more information to establish your financial position.

Of course, if you've calculated your costs and think you're better off buying a property sooner, it can be worth it. Once you have bought a property you can start paying it off and building equity. For some buyers, getting onto the property ladder faster is worth the extra cost.

Can I get a home loan with 95% or 100% LVR?

You can. While they aren't as common as loans with 80% to 90% maximum insured LVRs you can definitely find loans with 95% LVRs. These loans are available with just a 5% deposit, meaning you can jump into the property market with a much smaller deposit saved.

Here's an example to show just how much smaller a 5% deposit is.

Compare loans with 95% LVR

You can use a guarantor to get a home loan with 100% LVR

A long time ago (well, before the 2008 Global Financial Crisis), lenders were actually giving some borrowers 100% of the value of a property. Those days are over, but there is an exception for some lucky borrowers: a home loan with a guarantor.

Many lenders will lend you above 95% if your parents own a property and are willing to act as your guarantor. This means they agree to be responsible for your mortgage (or part of it) if you can't repay your loan.

It's a risky option. In the worst case scenario a borrower defaults on their loan and the parents are forced to sell their own house to cover the debt. But if everyone involved in the arrangement understands the risks and gets independent financial advice it can work out well.

Using a guarantor lets you avoid LMI too.

The First Home Loan Deposit Scheme

First home buyers who meet certain eligibility criteria can also get a home loan with a 5% deposit using the federal government's First Home Loan Deposit Scheme.

This scheme allows eligible buyers to borrow 95% of the property's value. The main benefit is that you can avoid paying LMI because the government will act as your guarantor.