Home loans 101: Loan to Value Ratio (LVR)
- Yuan Gao
- Aug 3, 2023
- 5 min read
Updated: Feb 25, 2024
Find out what a Loan to Value Ratio is, how it affects your home loan and how you can improve it.
The world of home loans can be filled with confusing terms, acronyms and abbreviations.
Our FND guides were created to give you a better understanding of the different jargon you might come across, so you can feel more confident about your property buying journey.
Your Loan to Value Ratio, also known as ‘LVR’, is a term all home buyers should be familiar with. It can have an impact on your borrowing power and can determine if you’ll need to pay additional fees to secure a home loan.
We’ll go through what a Loan to Value Ratio (LVR) is, how it affects your home loan and how you can improve it.
What is a Loan to Value Ratio (LVR)?
When you buy a home, lenders will ask what your Loan to Value Ratio is.
An LVR indicates what portion of the value of a property a buyer needs to borrow. In other words, it shows the value of your home loan as a percentage of the value of the property you’re buying.
How is your LVR calculated?
Your LVR can be calculated by dividing your loan amount by the value of the property and converting that into a percentage.
For example, let’s say the value of the property you’d like to buy is $800,000. You have a $200,000 deposit ready, meaning you’ll need to borrow $600,000. Your LVR would be: $600,000 (loan amount) / $800,000 (value of property) x 100 = 75%.
Why is your LVR important for buying property?
Before a lender can provide you with a home loan, they assess a number of factors to determine the level of risk you pose as a borrower.
Lenders will ask you to provide information on your income, genuine savings, assets and debts, your employment status, job stability and LVR, among other things.
Lenders take your LVR into consideration as this percentage indicates what percentage of your home’s value you’ll need to borrow. So, your LVR can affect your borrowing power as well as the likelihood of you getting a lower interest rate.
Is it better to have a high or low LVR?
The lower your Loan to Value Ratio, the better. The lower your LVR, the more equity you’ll have in your home to begin with.
In the eyes of a lender, a higher LVR makes you a higher risk borrower. This is because having a higher LVR means you’re borrowing a larger proportion of the value of your home.
As a result, the lender will be more likely to lend you a smaller amount or offer a higher interest rate to compensate for this risk.
What happens when your LVR is higher than 80%?
If you have an LVR above 80%, you’ll generally need to pay Lender’s Mortgage Insurance (LMI) when you get a home loan.
LMI protects the lender, not the borrower, in the event that the borrower defaults on their home loan repayments. It is a one-off payment that can be made upfront at the time of loan settlement or added to the total loan amount.
How much LMI you’ll be charged depends on a number of factors, including:
The size of the loan amount
Your deposit (a borrower with a 5% deposit will need to pay more than a borrower with a 10% deposit, for example)
What the property’s intended use is
Your employment stability and status
Your lender’s insurer.
Keep in mind, some lenders will allow you to have an LVR of up to 85% without charging LMI.
There are also certain situations and circumstances where the LMI fee is waived. For example, first home owner concessions or home loans for certain professions will often discount LMI or exempt the borrower from paying it.
Can you get a home loan with an LVR above 80%?
Yes, it’s still possible to get a home loan with an LVR above 80%.
But it’s important to understand that if you’re charged LMI, your loan amount and repayments will increase as a result.
You can calculate your estimated home loan repayments using FND’s Mortgage Repayments Calculator.
It may be useful to weigh the potential costs and consider if waiting and saving a bigger deposit before buying a home is a better option for you.
If you ever feel stuck or confused during the home buying process, book a time to chat with your local FND Broker.
How can you lower your LVR?
There are several things you can do to lower your LVR and get yourself in a better position to buy a home. Here are 5 different options:
1. Save a bigger deposit
This one might be obvious, but waiting before you buy and saving a bigger deposit can help lower your LVR.
A great way to save more cash is by reviewing your spending habits.
Cut back on any unnecessary spending and contribute the spare funds into your deposit.
Do you eat out 5 days a week? Try to cook more meals from home. Are you subscribed to 3 different TV streaming services? Cancel the ones you don’t use and watch your savings grow.
2. Buy a property with a lower purchase price
You can instantly lower your LVR without increasing your deposit by purchasing a property with a lower purchase price. Of course, your LVR shouldn’t dictate which house you buy, but it’s worth taking note of during your property search.
3. Receive monetary gifts
Many first home buyers receive a gift from their parents or family members to aid in the purchase of their first home.
If you’re lucky enough to have received a financial gift with no strings attached, you can contribute this to your deposit. It’s important in this case to declare the money as a gift and make sure there’s no obligation to pay it back.
Financial gifts are viewed by lenders as non-genuine savings so you might need to show you’re able to build genuine savings to avoid paying LMI.
4. Get a guarantor loan
Guarantor loans were created to help home buyers with little to no deposit for a home loan.
A guarantor loan requires another person, usually a family member, to offer part of their home equity as security for the buyer’s deposit.
It’s important to note that entering into a guarantor loan is a binding contract. In the case the borrower can’t pay the entire loan back, this responsibility falls on the guarantor.
The guarantor is released from the loan once it has been paid off or the value of the new home has increased to meet the lender’s policy.
5. Check if you qualify for a professional home loan
Some lenders will waive LMI fees for borrowers in professions that are considered low risk. These may include doctors, dentists, lawyers, accountants and more.
Make sure to check this with the lender as each lender may have a different list of professions.
If you have any questions regarding your LVR, or your home loan in general, we’re here to help. Reach out to an FND Broker and book a time to chat.
