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.

Here’s an explanation of loan to value ratio and what it means when you’re organising your home loan.

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.

How to calculate your LVR

The LVR is calculated by dividing the loan amount by the purchase price or valuation of the property you’re buying, expressed as 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?

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

Impact of the LVR on your home loan

Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower is the risk to the bank. Generally, lenders consider loans with a LVR over 80% of the property value to be a higher risk.

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.

If your LVR is greater than 80%, you’ll generally need to get Lenders' Mortgage Insurance (LMI).