What is LVR (Loan-to-Value Ratio) and Why It Matters for Your Home Loan

When it comes to securing a home loan, one term you’re almost certain to encounter is LVR or loan-to-value ratio. It’s a key figure that lenders use to assess the risk of lending to you and plays a significant role in determining your borrowing capacity, interest rates and whether you need to pay for lenders mortgage insurance (LMI). 

But what exactly is LVR, how is it calculated, and why does it matter so much for your home loan? We’ve put together this guide to explain everything you need to know about LVR, in simple terms, to help you make confident and informed decisions on your property journey.

What Is LVR (Loan-to-Value Ratio)?

The LVR is a percentage that represents the size of your loan compared to the value of the property you want to buy. In other words, it measures how much you are borrowing against the value of your home. 

The property value used can be the purchase price or the lender’s valuation, whichever is lower. Lenders often conduct their own valuation (or use automated valuation models) to make sure the property’s market value supports the loan. If the lender values the property lower than the purchase price, your LVR increases, which could affect your loan approval or add extra costs.

How is LVR Calculated?

LVR is calculated by dividing the loan amount by the property’s value and then multiplying by 100 to get a percentage. The formula looks like this:

LVR = (Loan Amount ÷ Property Value) × 100

For example:

If you want to buy a property worth $500,000, and you need a loan of $400,000:

• LVR = (Loan Amount ÷ Property Value) × 100

• LVR = (400,000 ÷ 500,000) × 100

• LVR = 0.8 × 100 = 80%

Your LVR would be 80%.

While many people think this means you always need a 20% deposit, that’s not the case. Lenders have different maximum LVRs depending on the type of loan:

• Owner-occupied purchase: Some banks will lend up to 95%

• Owner-occupied refinance: Up to 90%

• Investment property purchase: Up to 90%

• Investment property refinance: Up to 90%

This flexibility means you don’t always need a full 20% deposit to move forward with a loan. However, higher LVRs often come with trade-offs, such as the need to pay LMI or meet stricter lending requirements.

Why Is LVR Important?

LVR matters because it’s one of the main tools lenders use to decide whether to approve your loan and on what terms. It directly influences how much you’ll need to save, how much you can borrow and what your loan will cost you over time.

Here’s why it plays such a big role:

• Determines your deposit size: The higher the maximum LVR a lender allows, the smaller deposit you’ll need. For example, at 95% LVR, you may only need a 5% deposit, whereas at 80% LVR, you’d need 20%.

• Impacts your borrowing power: A higher LVR lets you access more funds, which can make the difference between securing your preferred property now versus waiting longer to save a bigger deposit.

• Affects your interest rates and loan fees: Loans with higher LVRs are considered riskier by lenders. Some may charge higher interest rates or add extra fees to balance that risk.

• Determines if you’ll pay LMI: Generally, loans above 80% LVR require LMI. While this adds to your costs, it can also be what makes it possible to buy sooner with a smaller deposit.

• Shapes your refinancing opportunities: Your current LVR will determine whether you can refinance, how much equity you can access, and whether you’ll need to pay LMI on the new loan. Some lenders allow refinancing up to 90% LVR for both owner-occupied and investment properties.

What LVR Means for First Home Buyers

First home buyers often feel pressured to save a 20% deposit. In reality, you may be able to purchase with as little as 5% deposit if your lender allows up to 95% LVR. On top of this, the Home Guarantee Scheme may let eligible buyers purchase with a 5% deposit without LMI. This opens the door to homeownership sooner, though it’s important to consider the trade-offs, such as higher repayments or extra insurance costs.

At Richmond Residential, we help first home buyers navigate these options and understand how LVR affects their borrowing power and costs.

How LVR Affects Refinancing

When refinancing, your LVR is just as important. For some lenders, up to 90% LVR is possible for both owner-occupied and investment property refinances. If your property has grown in value or you’ve repaid a large chunk of your loan, your LVR will drop, which might allow you to access better loan terms or avoid LMI on a new loan.

Richmond Residential can assist with refinancing options, helping you understand your current LVR and find ways to improve your loan conditions.

Ways to Improve Your LVR

A lower LVR can lead to better loan terms and lower costs. Here are some ways to improve your LVR:

• Increase Your Deposit: The most straightforward way to lower your LVR is by saving a larger deposit.

• Choose a Lower-Priced Property: Opting for a property within a price range that allows a comfortable deposit can improve your LVR.

• Consider a Guarantor Loan: Some lenders allow family members to guarantee part of your loan, reducing your LVR and potentially avoiding LMI.

• Make a Larger Loan Repayment: If you already have a loan, making extra repayments can reduce your loan balance and lower your LVR.

Why Richmond Residential Is Your Trusted Home Loan Partner

Navigating LVR and home loan options can be complicated, but Richmond Residential is here to simplify the process. Our experienced mortgage brokers take the time to assess your financial situation, explain what LVR means for you and guide you to the best loan products suited to your needs.

We work with a wide range of lenders across Australia, helping you secure competitive rates and terms while ensuring you understand all the costs involved, including LMI. Whether you’re a first home buyer or looking to refinance, our personalised approach ensures you make informed decisions.

Final Thoughts

The loan-to-value ratio (LVR) is a critical factor in home loans, affecting everything from your borrowing capacity and interest rates to whether you’ll need to pay LMI. Understanding LVR helps you plan your deposit savings, manage your loan costs and make smarter property decisions.

If you’re looking to buy your first home or refinance an existing loan, Richmond Residential can help you understand your LVR and find the best financing options to suit your goals. Contact Richmond Residential today to speak with one of our expert brokers and take the first step towards securing a home loan that works for you.