In the home loan market, a common term you may hear is loan-to-value ratio, or LVR. We explain exactly what it is and how it can affect your home loan interest rate.
- What is a loan-to-value ratio (LVR)?
- What is a good LVR?
- What is a good LVR for an investment property?
- How to calculate your LVR
- How can LVR affect your interest rate
- Lender valuation vs. purchase price
- 100% LVR: the maximum ratio
What is a loan-to-value ratio?
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) – calculated as a percentage. It is used by lenders to assess the risk factor of a loan. The lower your LVR percentage, the less of a risk that particular loan is to a potential lender.
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 fees that sometimes get applied to home loans (eg. Lenders Mortgage Insurance (LMI)).
What is a good loan-to-value ratio?
For many lenders, 80% or lower (20% deposit or more) is generally considered to be a good loan-to-value ratio (LVR). Most lenders will not charge lenders mortgage insurance on loans with an LVR of 80% or less.
However, some lenders 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.
Variable home loans
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
- No ongoing fees
- Unlimited redraw facility
Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) owner-occupied home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
What is a good loan to value ratio for an investment property?
Ideally, your LVR should be in the 80% or below region 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 John was looking at a property which had a valuation of $450,000 (not its price, its value) and he had a $90,000 deposit, he would need to borrow $360,000.
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 John’s loan-to-value ratio is 80%.
How can LVR affect your interest rate?
LVR can affect your interest rate 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.
Along with potentially having a higher interest rate, borrowers with a higher LVR can also be hit with Lender’s Mortgage Insurance, or LMI, which acts as something of a safety net to the lender should you be unable to make your monthly loan payments. It can vary in price depending on the lender and what LVR percentage you have, but can leave you 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 Genworth LMI estimator, if you have an LVR of 90% on a $450,000 loan for up to 30 years, you could be hit with an LMI premium of $7,776.
Here’s a quick look at what you might expect to pay for LMI based on varying house prices and LVRs:
Estimated Lenders Mortgage Insurance (LMI) Premiums for First Home Buyers
|Estimated property value||95% LVR||90% LVR||85% LVR|
Source: Genworth LMI premium estimator. 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 waiting longer to save up a bigger deposit. But this isn’t practical for everyone.
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.
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. Saving for a house deposit can take a long time – up to 8 years 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. So sometimes it’s worth just jumping in with a 5-15% deposit since you can potentially gain far more from selling a house than you’d have to pay an LMI premium plus a slightly higher interest rate.
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.
100% LVR home loan: the maximum loan-to-value ratio
It’s possible to get a loan without paying a deposit on your home – that’s 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 in the event 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 housing deposit.
Variable home loans with 95% LVR
What’s the LVR formula?
The LVR (loan-to-value ratio) formula is fairly straightforward. As it’s name suggests, it is essentially the size of your loan divided by the value of property, expressed as a percentage:
LVR = Loan amount / property value
For example, here’s how you’d calculate the LVR on a $400,000 loan for a $500,000 property:
= 400,000 / 500,000
LVR = 80%
So in that example, the 80% represents the portion of the property still to be repaid, while the remaining 20% represents the borrower’s equity in the property.
What is a good loan-to-value ratio for refinancing?
When refinancing your home loan, you should generally aim to have a loan-to-value ratio of 80% or less. Otherwise, you may have to pay for lenders mortgage insurance again.
Savings.com.au’s two cents
The LVR, or loan-to-value ratio, 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.
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): Credit Union Australia, 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.
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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