What is a Loan to Value ratio (LVR)?

Turns out … what you’re willing to pay for your place isn’t always the same as what it’s worth.

You’ve found your dream home. It’s close to the station, walking distance from your favourite bar, and it’s got a little garden for your hypothetical future dog. You would borrow literally any money for the chance to live here.

Unfortunately, your lender may not share your enthusiasm. They have processes to reduce their risk if things go pear-shaped. Enter: loan to value ratio – or LVR.

Remember, any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation.

How much is a property worth?

Let’s take a step back. The value (V) of a property is determined by what the market is willing to pay for it. If you’re head over heels, you might be willing to pay more than what it’s actually worth – which isn’t the same as its market value – that’s its value to you. And market value can change over time: say you give it a sweet reno, or the market goes up or down.

Your lender will decide how much they think the property is worth on the market. Sometimes, they might work out that the market value is less or more than what you have paid or are willing to pay for it.

Okay, so what is LVR?

Loan to value ratio is a calculation of how much you’re borrowing versus market value. Your deposit will reduce the total loan amount, but your lender still needs to be confident their own risk is covered.

Hard truth life stuff time: this comes down to, if life throws you a massive curve ball and the place has to be sold, is there enough of a buffer to make sure your lender won’t be out a bunch of money? In the same way that you probably wouldn’t want to lend your mate $2000 for an NFT that will ‘totally increase in value’, your lender wants to play it safe too.

How is LVR calculated?

Let’s say your lender values your dream home at $500,000. You’re a legend who’s saved an $80,000 deposit, which means you still need to borrow $420,000, plus any fees you’ll need to borrow money to pay, like stamp duty for example.

Your LVR is your loan as a percentage of the value of the property. Putting aside fees for a moment, in this example, it would be $420,000 as a percentage of $500,000:

420,000 ÷ 500,000 x 100 = 84%

So, your loan would be 84% of the value of the property.

What happens if my LVR is too high?

LVR is a big consideration for the lender assessing your application. If your LVR is over 80%, or potentially 70% in high density housing, you’ll probably have to pay for insurance (LMI) to cover your lender in case your circumstances change.

Simply put: the lower your LVR, the better. It’s not just a lower risk for the lender – it’s also a lower risk for you. Property prices are vulnerable to fluctuations in the market, from changing demand to interest rate hikes and availability. A smaller loan reduces the potential pain.

The LVR your lender will accept depends on a whole bunch of factors: how much you’re borrowing in actual dollars, your banking history, income and employment, the type of loan, even the location of the property.

Speak to your lender directly to find out what they can offer. And, as always, it’s a good idea to seek independent advice to make sure you understand your options and their implications.

How many more acronyms can there be??

Home loan land loves three-letter acronyms. We’ve built a whole glossary to help you decipher them.