What does LVR mean, and how does it affect interest rates?

author-avatar By on April 13, 2021
What does LVR mean, and how does it affect interest rates?

In the home loan market, a common term you may hear is loan-to-value ratio, or LVR. But what does LVR mean exactly?

In this article, Savings.com.au will explain what LVR means & how it can affect your mortgage.


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
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
WIN YOUR HOME LOAN INTEREST FREE

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • WIN your home loan interest free and save up to $1.1 million. Refinance by 29 October. T&Cs apply.
  • Refinance Only. Fast online application, refinance in minutes, not weeks.
  • No Nano fees, Free 100% offset sub account. Mobile app. Visa debit card & instant payments.
WIN YOUR HOME LOAN INTEREST FREE

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • WIN your home loan interest free and save up to $1.1 million. Refinance by 29 October. T&Cs apply.
  • Refinance Only. Fast online application, refinance in minutes, not weeks.
  • No Nano fees, Free 100% offset sub account. Mobile app. Visa debit card & instant payments.
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Rates correct as of September 25, 2021. View disclaimer.

What does LVR mean?

A loan-to-value ratio, or ‘LVR’ as it is commonly referred to in the industry, is the value of a property in comparison to the amount of money being borrowed through a home loan). LVR is calculated as a percentage, and is used by lenders to assess the risk of accepting a loan application. The lower the LVR, the lower the risk that particular loan is to a potential lender in most cases. 

Keeping track of your LVR when house hunting is important as it gives you a good indication of the buying power of the deposit that you’ve managed to save. A good LVR can also help you avoid certain home loan fees such as Lenders Mortgage Insurance (LMI). We'll show how important this can be later on.

What is a good loan-to-value ratio?

For many lenders, 80% or lower, which is a deposit of at least 20%, is generally considered to be a good LVR. Most lenders will not charge lenders mortgage insurance on loans with an LVR of 80% or less, but some may require an LVR as low as 60% for properties they consider to represent a higher risk (i.e. at risk of significant falls in value), or for borrowers who want to qualify for especially low-rate home loans

What is a good loan to value ratio for an investment property?

Ideally, your LVR should also be 80% or less for an investment property, just as it should be for an owner-occupied one. It’s particularly important for investment home loans since they tend to have slightly higher interest rates. A 95% LVR, for example, could cost more on investment properties, as you’re likely to be paying a higher interest rate on a greater loan amount.

If you’re using the equity in your home to buy an investment property, most lenders will often require you to have at least 20% of the property’s value in equity.

How to calculate your LVR

Lenders typically calculate your LVR by dividing the loan amount by the property’s value and multiplying it by 100.

For example, if you were looking at a property valued at $450,000 (not its price, its value) and had a $90,000 deposit, you would need to borrow $360,000 from a lender. By dividing $360,000 (the loan amount) by $450,000 (the valuation of the property), we get 0.8 which, multiplied by 100, means that your loan-to-value ratio for this hypothetical loan is 80%.

Property value

Deposit

Loan amount

LVR

$450,000

$45,000

$405,000

90%

$450,000

$67,500

$382,500

85%

$450,000

$90,000

$360,000

80%

$450,000

$112,500

$337,500

75%

$450,000

$135,000

$315,000

70%

$450,000

$175,000

$275,000

60%

You can use this formula to work out your own potential LVR. You can also use the Savings.com.au Home Loan Borrowing Power Calculator to find out the maximum you might be able to borrow, which can help you get your required deposit size right. 

How can LVR affect your interest rate?

LVR can impact the interest rate on your home loan because many lenders actually apply a lower interest rate to borrowers with lower LVRs. Why? Because these borrowers represent less risk to lenders. A low LVR means the property should be worth considerably more than the debt that’s owed, so if the borrower were to default on the loan, the lender will have a good chance of recovering their debt by repossessing the borrower’s property and selling it.

Compare some of the lowest variable interest rates on offer among home loans with a 95% LVR in the table below, and see how they stack up against 20% LVR loans in the table above. 

Variable home loans with 95% LVR

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
NO UPFRONT OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 95%)

NO UPFRONT OR ONGOING FEES
VariableMore details

Real Deal Variable Home Loan Special (Principal and Interest) (LVR 80%-95%)

VariableMore details

Home Advantage Variable Home Loan ($250k-$700k) (LVR 90%-95%)

VariableMore details

Basic Home Loan (LVR ≥ 90%)

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 made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. 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. Rates correct as of September 25, 2021. View disclaimer.

How can LVR affect your LMI cost? 

Along with potentially having a higher interest rate, borrowers with a higher LVR can also be hit with Lender’s Mortgage Insurance, or LMI. LMI acts as something of a safety net to the lender should you be unable to make your monthly loan payments - it is not insurance for the borrower. It can vary in price depending on the lender and what LVR percentage you have, but can leave you tens of thousands of dollars out of pocket if you aren’t careful.

The lending industry average LVR where LMI is applied is from approximately 80% and higher. According to the Savings.com.au LMI estimator, if you have an LVR of 90% on a $400,000 loan for up to 30 years, you could be hit with an LMI premium of more than $8,500. On a loan twice that size it would cost almost $18,000. 

Here’s a quick look at what a first home buyer can expect to pay for LMI based on varying house prices and LVRs:

Estimated property value

95% LVR LMI cost

90% LVR LMI cost

85% LVR LMI cost

$200,000

$4,727

$3,498

$1,550

$400,000

$11,897

$8,575

$3,777

$600,000

$23,954

$13,284

$6,463

$800,000

$31,939

$17,712

$8,617

Prices including GST but excluding stamp duty. Based on a loan term up to 30 years.

So if you want to avoid LMI and put yourself in a good position to qualify for lower interest rates, you could aim to have a lower LVR by buying a property in a lower price bracket, or by waiting longer to save up a bigger deposit. But this isn’t practical for everyone.

Case study

Tim was looking at houses for $450,000 and had $22,500 in his savings. If he had calculated his loan-to-value ratio before applying for a loan, he would have discovered that he had an LVR of 95%. Because of this high ratio, the lender thought he was too high of a risk and rejected his application.

Tim decided against buying the house and saved up until he had $90,000 in his savings – which achieved an LVR of 80%. When he reapplied for the loan, it was approved by the lender and he didn’t have to pay any LMI.

Lender valuation vs. purchase price

Often, the lender’s official valuation of the property (from when they send someone out to conduct an independent valuation) will differ from the actual sale price for it. This can affect your LVR, and presents two scenarios:

a. If a valuation is less than the purchase price

Scenario: If the purchase price of the house is $600,000, and you’re borrowing $450,000, then you estimate your LVR to be 75% - enough to avoid LMI. But when the lender does its valuation, it deems the house to be worth $530,000, which would set your LVR to just over 84%.

In this case, the lender might:

  • Go ahead with the loan, but make you pay LMI; or
  • Refuse to lend to you, since they might have criteria to only lend to people with an 80% LVR or below.

It can sometimes be beneficial to get an independent valuation done to avoid this situation.

b. If a valuation is higher than the purchase price

Alternatively, if the lender values the property at a greater amount than the purchase price, then your LVR will decrease, as you’re borrowing a smaller amount of the overall value. This is less likely to happen though as lenders tend to be more conservative with their valuations as they need to know what the property is worth in the event you can’t meet your repayments and they have to sell it.

sell it.

Do you always need a lower LVR?

There are good reasons why you’d want an LVR of at least 80%. As discussed above, a 20% deposit or greater can help you secure a lower interest rate and more favourable lending conditions, which in turn can seriously reduce your monthly interest repayments. Plus, you can potentially save yourself thousands in LMI premiums.

But sometimes an 80% LVR might not be practical. It can sometimes be worth paying a lower deposit and copping the LMI penalty to ensure you buy into the market quickly. Saving for a house deposit can take a long time – over six years on average in Sydney – and over this time the value of the house you’ve got your eye on can increase significantly. A $25,000 LMI premium could look like pocket change compared to a $100,000+ increase in the capital value of the house, and you’d be kicking yourself if you missed out on this opportunity because you wanted to wait for a higher deposit.

If recent house price gains are anything to go by, the capital gains on your property could far exceed any savings you could make by not paying lenders mortgage insurance. So sometimes it’s worth just jumping in with a 5-15% deposit. Just make sure your interest rate isn’t too much higher: an interest rate that’s 100 basis points higher can result in tens (if not hundreds) of thousands more being paid in interest over the life of the loan.

The following calculators can help you reach a decision on whether you need a 20% deposit or not:

100% LVR home loan: the maximum loan-to-value ratio

It’s possible to get a loan without paying a deposit on your home – (i.e an LVR of 100% or more) – but not by yourself. You can be approved for a home loan with an LVR of 100% or even as high as 110% (e.g. if you’re consolidating other debts into the home loan) through the use of a guarantor, which is someone (usually a parent) who agrees to take responsibility for repaying the home loan should you fail to make the repayments.

This is quite risky on behalf of the guarantor, so it’s not a decision that can be made lightly. But by making extra repayments on your mortgage or having the value of your property increase, the guarantor may become unnecessary.

Guarantor home loans are popular among first home buyers or people with lower incomes who struggle to afford a high enough deposit.

Savings.com.au’s two cents

The LVR is indicative of how much of the property’s value you have to repay to the lender. A higher LVR can cost you more over the life of the loan because:

  • You may have a higher interest rate
  • You may have to pay LMI
  • You’re borrowing more for the property

But as discussed, it’s not always practical or economical for someone to hold off buying property until they have an LVR of at least 80%, because property prices may rise significantly over the time it takes to save up a 20% deposit. So in general, aim to have an LVR of at least 80%, but consider whether you can afford to wait and think about jumping in when you can.


Photo via Roungroat on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked at financial research firm and comparison site Canstar before helping to launch Savings.com.au in November 2018. Dominic's commentary has featured in various news outlets, including: Channel 7 News, News.com.au, Domain, Realestate.com.au, Daily Mail, Radio 2NURFM and DrWealth.

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