What does LVR mean?
Loan to value ratio (LVR) is the amount you’re borrowing represented as a percentage of the value of the property you’re buying. It’s used by lenders to assess the risk of a loan and how much they’re willing to lend you.
Lenders 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’ll own).
What is good LVR?
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. The way you reduce your LVR is through your cash deposit: the larger your deposit, the lower your LVR.
The minimum deposit for most lenders is between 5% -10% of the value of a property; however, some lenders may loan to buyers with no deposit at all if they have a guarantor behind them.
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.
What does LVR mean to me as a buyer? From a buyer’s perspective, aiming for an 80% LVR or less means that you could potentially save yourself thousands of dollars by avoiding Lenders’ Mortgage Insurance (LMI).
How to calculate your LVR.
Banks use two numbers to calculate your LVR:
- The loan amount you’re applying for
- How much the property is worth (either the purchase price or bank valuation).
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 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%.
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.
Why is LVR so important?
LVR plays a part in answering several important questions home buyers may have, including:
- how much LMI will I 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 savings could end up going towards your home deposit
- Is my loan likely to be approved? 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
- what will my repayments be? A higher LVR often brings with it a higher interest rate, meaning higher repayments. You can use our Repayment Calculator to get a good estimate of your repayments
- what are my 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 can I 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.
Still have some niggling questions?
Loans can be confusing, which is why we’re here to make the complicated stuff simpler. You can call us on 13 25 85, visit a branch, or book a chat with a Lending Specialist.
Buying your first home?
Now that's exciting! If you need a hand learning the lingo or understanding the home buying process, check out the guides, tools, FAQs, and calculators available on our first home buyer hub.
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