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Home Loans

Loan to value ratio (LVR).

If you’re thinking about buying a home or investment property, you’ve probably come across banks using the term LVR more than once. What is LVR and how does it affect you as a buyer? Below we cover off what you need to know about these three important letters.

What does loan to value ratio (LVR) mean?

LVR is an acronym for loan to value ratio. It’s something that banks use to assess how risky a loan is and how much they’re willing to lend you. What LVR does is compare the amount you’re looking to borrow with the price or value of the property you want to buy.

Banks also use your LVR to determine what level of equity you’ll have in your property, in other words, how much of the property you actually own. The more equity you have in your property, the more likely lenders will be able to recoup their money back in the unlikely event you default on your loan.

How to calculate your LVR.

Banks use two numbers to calculate your LVR:

  • The first number is the loan amount you’re applying for
  • The second is either the purchase price or bank valuation of the amount of the property. 

Whether a bank will use the purchase price or a bank valuation to calculate your LVR depends on the circumstances of your loan. Some banks will use the whichever figure is lower. Other banks will use the price on the Contract of Sale, providing your LVR is 80% or less and the loan is under $800,000.

To calculate the LVR, a bank will divide the home loan amount by the purchase price or property value. 

Here's an example:

Let’s say you’re planning to purchase a property that has been valued at $500,000.
You’ve saved a 20% deposit of $100,000, and so you need to borrow $400,000.

Your LVR is calculated as follows:
$400,000 / $500,000 = 0.8 (or 80%).

Based on this calculation, your LVR is 80%.

A common misconception is that the LVR is a static number. Far from it. Your LVR ratio will fluctuate as the value or price of your property increases (or decreases) or if you decide to borrow more or on your existing mortgage for example.

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What is good LVR?

This is a good question and the answer will probably differ depending on who you ask. The lower your LVR, the less risk you represent to a bank. That means you’ll be in a much stronger position when applying for a home loan. Ideally, you should save as much as possible to reduce your loan amount and your LVR ratio.

But what LVR should you aim for?

From a bank’s perspective, you’ll need between a 5-10% minimum deposit, which puts your LVR at around 90-95%. Some banks may loan to buyers with no deposit at all if they have a guarantor behind them. This could be considered a high-risk strategy for all parties. If you take out your home loan with Beyond Bank, you’ll need at least 10% deposit (or 5% if eligible under the Home Guarantee Scheme), which we believe is a much safer minimum.

From a buyer’s perspective, aiming for an 80% LVR or less means that you could save yourself thousands of dollars by avoiding the dreaded Lenders Mortgage Insurance (LMI).

Why is LVR so important?

Even though LVR is used by banks, it’s useful for buyers too. Knowing where you want to land with your LVR calculation can help you answer all sorts of bigger questions. Should you buy now or keep saving diligently to reduce your ratio? How much of your deposit should you hold back for other expenses such as stamp duty and legal fees? And perhaps even whether you’re financially ready to buy. Your LVR calculation will also affect your wallet in a number of ways:

  • How much LMI you’ll need to pay – The higher your LVR calculation (80% and above), the more LMI you’ll have to pay. In turn, that means less of your precious savings could end up going towards your home deposit.
  • Your loan approval – Your LVR calculation is a big factor in whether your home loan application is approved. A lower LVR means that the loan is less risky to banks, because there’s more equity in the property.
  • Higher mortgage repayments – With a higher LVR, you are likely to have higher mortgage repayments to cover each month. You can use our home loan repayment calculator to get an estimate of your repayments.
  • Fewer borrowing options - If you have a high LVR, you’ll have fewer borrowing options and less flexibility in your home loan. Fewer borrowing options could mean that your loan ends up costing you more.
  • How much more you can borrow – Your LVR will influence how much you might be able to borrow down the track. So, if you’re planning to refinance and borrow more money for things like renovating your property in a few years, you’ll need to bear this in mind.

How to use LVR to work out your target property value.

Another way that LVR is useful to buyers, is that it can help calculate what ballpark property price or value to aim for.

Let’s say you’ve saved up a deposit of $150,000 and would like no more than an 80% LVR to avoid paying Lenders Mortgage Insurance. To achieve a maximum LVR of 80%, your deposit needs to be at least 20% of the property price or valuation. In this scenario, that would mean your property can be priced or valued at no more than $750,000.

If $750,000 is below the kind of property you’re considering, you’d need to either increase your LVR or hold off until you’ve saved up a bigger deposit.

Important note: If the $150,000 you’ve saved also needs to cover things like stamp duty and legal fees, the actual deposit you have available will be less. Make sure you factor this in before you do your LVR calculation.

We’ve got some handy home loan calculators to help you calculate things like stamp duty and what home loan repayments you’ll need to budget for.

Important things to think about.

Property market performance
How the property market is performing is an important factor when deciding when to buy. If property values are rising fast, holding off for a year or two until you have your 20% deposit could mean that you miss out on property gains. Or, if you have your deposit ready to go but property values are falling, it could pay off to wait a while longer.
Your plans for the future
If you have your heart set on a dream renovation, a higher LMI will limit the amount of money you may be able to borrow. Or, if you’re planning to start a family and expect a dip in your household income, it might be a good idea to veer on the conservative side.
Your own peace of mind
Your own peace of mind - It might be tempting to go for a more expensive property or buy sooner than you’re ready. But stretching yourself too far could impact both your financial and emotional wellbeing. At the end of the day, it’s about understanding your comfortable borrowing limits and what will allow you to sleep easy at night.

First home buyer?

Buying your first home is an important life decision and our First Home Buyers Guide will take you through it, step by step.

We're here to help.