The first thing many wishful home buyers consider when looking for a property is how much they can afford to spend.

That will likely depend on how much they can afford to borrow through a home loan facility. A major factor in determining how much a person can borrow is the size of their deposit.

Why? Because that will likely determine their loan-to-value ratio (LVR)

## What is a loan-to-value ratio?

A LVR represents how much of a property’s value has been borrowed in the form of a home loan.

To calculate your LVR, you can use this formula:

(loan amount / property value) * 100 = LVR

Or, you could simply enter the details of your dream property and your deposit amount into Savings.com.au’s loan-to-value ratio calculator above.

Some common breakdowns are below:

Property Value

LVR - Loan Amount

Deposit Needed

\$500,000

1. 95% - \$475,000

2. 90% - \$450,000

3. 80% - \$400,000

1. \$25,000 (5%)

2. \$50,000 (10%)

3. \$100,000 (20%)

\$700,000

1. 95% - \$665,000

2. 90% - \$630,000

3. 80% - \$560,000

1. \$35,000 (5%)

2. \$70,000 (10%)

3. \$140,000 (20%)

\$1,000,000

1. 95% - \$950,000

2. 90% - \$900,000

3. 80% - \$800,000

1. \$50,000 (5%)

2. \$100,000 (10%)

3. \$200,000 (20%)

\$1,200,000

1. 95% - \$1,140,000

2. 90% - \$1,080,000

3. 80% - \$960,000

1. \$60,000 (5%)

2. \$120,000 (10%)

3. \$240,000 (20%)

\$1,500,000

1. 95% - \$1,425,000

2. 90% - \$1,350,000

3. 80% - \$1,200,000

1. \$75,000 (5%)

2. \$150,000 (10%)

3. \$300,000 (20%)

\$2,000,000

1. 95% - \$1,900,000

2. 90% - \$1,800,000

3. 80% - \$1,600,000

1. \$100,000 (5%)

2. \$200,000 (10%)

3. \$400,000 (20%)

## Deposits, property values, & principal balances: The breakdown

Typically, when a person goes to buy a property, they must first save up a deposit. Generally, a deposit that’s worth 20% of what they wish to pay for a home is considered healthy.

A person who can put down a deposit worth 20% of their home’s value would likely need to borrow the remaining 80% in order to purchase their pad. In such a circumstance, they would walk away with a LVR of 80%.

The 80% of their property’s price that they borrowed would become the principal balance of their home loan.

So, if a person were to buy a \$400,000 apartment with a \$100,000 deposit, they would have a home loan with a principal balance of \$300,000 (a 75% LVR).

Fun fact: Your LVR will generally be considered using the property’s value, not the amount you paid for it.

If a valuator deems that you snapped up a bargain, you might end up with a lower LVR than you expected, and if you happen to overpay, your LVR could be higher than you planned as you’ll need to borrow more to cover the purchase price.

### For example

Take for example, Lois and Vallery, who scrimped and saved for two hard years and managed to save up a \$100,000 deposit. They also fell in love with a unit valued at \$500,000 in the suburbs of Melbourne.

Since Lois and Vallery could put down a \$100,000 deposit to purchase their home and took out a home loan for the remaining \$400,000, they were able to get a mortgage with a LVR of 80%.

Formula: (\$400,000 / \$500,000) * 100 = 80%

## Why do loan-to-value ratios matter?

Lenders use LVRs, along with other metrics such as serviceability tests and credit scores, to determine the risk profile of a home loan borrower.

When a borrower signs up to a home loan, they generally agree that if they default, their lender can take ownership of their property and sell it to recover its debts. If a homeowner with little to no equity defaults and the bank sells their property for less than their purchase price, the bank would have incurred a loss.

Thus, borrowers with higher LVRs are generally thought to represent a higher risk for lenders. For that reason,  borrowers with lower LVRs are typically offered better interest rates than those with higher LVRs.

Many lenders also have a maximum LVR they will consider.

For instance, at the time of writing, ubank won’t provide home loans to owner occupiers with an LVR higher than 85% or investors with an LVR of over 80%. On the plus side, the digital bank does not demand any borrowers pay for lenders mortgage insurance (LMI).

Lenders that do loan to borrowers with higher LVRs might be more sceptical when assessing the applications of borrowers with small deposits. If you’re considering purchasing with a particularly high LVR, it could be wise to get your financial ducks in a row prior to doing so.

## What happens if your LVR is higher than 80%?

If you're considering buying a property with a small deposit compared to the property’s value, you will probably be offered a higher interest rate than another borrower who plans to buy with a greater portion of equity. That means your repayments will likely end up being higher.

If you're purchasing a home with a LVR of above 80%, your lender might ask that you pay LMI. Don’t be fooled, LMI doesn’t insure you against defaulting. Rather, it protects your lender from realising a loss in the event you default on your home loan.

LVR can add up to tens of thousands of dollars, in some cases. However, many buyers – particularly first home buyers – choose to pay LMI as it allows them to get onto the property ladder faster.

In fact, some buyers choose to fork out for the charge in hopes that they can realise house price growth during the time they would otherwise be growing their deposit and, ultimately, end up better off for doing so.

You might also run into problems at the higher end of the property scale if your LVR is above 80%, because many lenders limit loans to \$1,000,000 or so.

## Already purchased a property? Here’s how you can reduce your LVR

Good news! Once you’ve purchased a property and begin making home loan repayments, your LVR will start dropping. While it will fall slowly to start with, it will increase in pace as the years go by.

When you first take out a home loan, you’ll be paying interest on all the funds you’ve borrowed. For that reason, only a small slice of your repayments will go towards paying off your principal balance (the amount you owe) while the majority will go towards paying interest.

As you pay more and more of that balance off, however, the amount of interest you pay will shrink (assuming your interest rate doesn’t increase), while the slither that goes to paying off your principal will grow. This is called the amortisation schedule.

Voila, your equity will increase and your LVR will decrease. As the years go on, you’ll likely see your LVR fall simply because you’ve continuously made your regular repayments.

If you wish to speed up the process, however, there are plenty of ways to do so. You could make extra repayments, thereby paying off your principal balance faster.

You might also be able to make improvements to your property and get it revalued. Or, if you think properties in your neighbourhood have soared in value since you bought, you might be able to get your pad revalued so as to lower your LVR. Though, it could be worth chatting to your lender about such a possibility before going down that route.

The other way you can reduce your LVR, and perhaps get a better home loan deal in the meantime, is to refinance. Your home will likely need a new valuation as part of the refinancing process, so if you reckon it's worth more now than when you bought it, you might end up with a lower LVR and a more competitive mortgage.

However, refinancing isn’t free. There are many costs associated with doing so that should be considered against any potential longer-term benefits.

## Looking for a home loan?

Buying a home or looking to refinance? The table below features home loans
with some of the lowest interest rates on the market for owner occupiers.

Lender

Fixed
• Available for purchase or refinance. 90% LVR
• Fast turnaround times. Can meet 30-day settlement
• No monthly or ongoing fees, split with low-rate variable loan
Disclosure

#### loans.com.au – Fixed Rate OO P&I (3 years)

• Available for purchase or refinance. 90% LVR
• Fast turnaround times. Can meet 30-day settlement
• No monthly or ongoing fees, split with low-rate variable loan
Disclosure
Variable
Apply in minutes
• No application or ongoing fees. Annual rate discount
• Unlimited redraws & additional repayments. LVR <80%
• A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Disclosure
Apply in minutes

#### Unloan – Variable Rate Home Loan LVR < 80%

• No application or ongoing fees. Annual rate discount
• Unlimited redraws & additional repayments. LVR <80%
• A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Disclosure
Fixed
Disclosure

#### Macquarie Bank – Basic Home Loan (Owner Occupier, Principal and Interest, max LVR 70%) (2 years)

• Competitive rates and low fees
• Fast approval times
• Flexible home loan options
Disclosure
Variable
4.6 Star Customer Ratings
Disclosure
4.6 Star Customer Ratings

Disclosure
Variable
Disclosure

Disclosure
Variable

#### ubank, part of National Australia Bank – Neat home loan - max. 80% LVR (Owner occupied, Principal and interest)

Variable
Disclosure

#### Macquarie Bank – Offset Home Loan (Owner Occupier, Principal and Interest, max LVR 70%)

Disclosure
Variable
Disclosure

#### Westpac – Flexi First Option Home Loan (Promo) - Principal & Interest (LVR up to 70%)

Disclosure
Variable
Disclosure

#### ANZ – Simplicity PLUS Home Loan (Principal and Interest) (LVR < 70%) (New Customer) Special offer

Disclosure
Variable
Disclosure

#### NAB – Tailored Home Loan Variable Rate - Principal and Interest LVR 60% or less

Disclosure
Variable
Disclosure

#### Commonwealth Bank – Wealth Package Variable Home Loan (Principal and Interest) (LVR 80% - 90%)

Disclosure
Variable
Disclosure

#### loans.com.au – Solar Home Loan (Principal & Interest) (LVR < 90%)

Disclosure
Variable

#### Heritage Bank – Discount Variable \$700,000+ LVR<=70%

Variable

#### Gateway Bank – Green Plus Home Loans

Variable

#### Bank Australia – Clean Energy Home Loan Package Eco/Eco Upgrade LVR <90%

Variable

#### Up – Up Home Variable (Principal & Interest) (LVR < 90)

Variable

#### Tiimely Home – Live-in Variable Loan Home Loan (Principal and Interest) (LVR < 90%)

Variable

#### Bank of us – FlexiDiscount Variable Rate Loan Special <80% LVR

Variable

#### HomeStar – Star Essentials Owner Occupied

Variable

#### Horizon Bank – Home Sweet Home Loan LVR <= 70%

Important Information and Comparison Rate Warning

Base criteria of: a \$400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a \$150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of September 20, 2024. View disclaimer.

Important Information and Comparison Rate Warning