LVR Explained: What to Know About Loan-to-Value Ratio

Understanding LVR calculations

Loan-to-Value Ratio (LVR) represents the percentage of a property's value that you're borrowing. This key metric significantly influences your loan approval, interest rate, and whether you'll need to pay lender's mortgage insurance.

LVR calculation formula: LVR = (Loan Amount ÷ Property Value) × 100

Practical examples:

• Borrowing $400,000 on a $500,000 property = 80% LVR
• Borrowing $450,000 on a $500,000 property = 90% LVR
• Borrowing $475,000 on a $500,000 property = 95% LVR

LVR impact on loan terms

Your LVR directly affects loan approval likelihood, interest rates offered, available features, and additional costs like lender's mortgage insurance.

80% LVR and below (20%+ deposit): This is considered the optimal LVR range, offering the best loan terms and avoiding additional insurance costs.

• No lender's mortgage insurance required
• Access to best available interest rates
• Full range of loan features and benefits available
• Easier loan approval process with standard documentation

80-90% LVR (10-20% deposit): This range requires lender's mortgage insurance but still provides access to competitive loan products with most standard features.

• Lender's mortgage insurance premium required
• Competitive interest rates available
• Most loan features remain accessible
• Standard approval process with additional LMI assessment

90%+ LVR (less than 10% deposit): High LVR loans require careful assessment and involve higher costs, with more limited lender options and stricter approval criteria.

• Higher lender's mortgage insurance premiums
• Stricter serviceability and approval criteria
• Limited lender options and loan products
• May require additional documentation or guarantees

Understanding Lender's Mortgage Insurance

LMI protects lenders against losses if borrowers default on high LVR loans. Borrowers pay this insurance premium, which varies based on loan amount, LVR, and risk factors.

Typical LMI cost ranges:

• 85% LVR: $3,000-$6,000 depending on loan size
• 90% LVR: $6,000-$12,000 for most loan amounts
• 95% LVR: $12,000-$20,000+ for larger loans

LMI payment options: You can pay LMI as a lump sum at settlement or add it to your loan amount. Adding to the loan means paying interest on the LMI amount over the loan term but avoids large upfront costs.

Strategies for improving LVR

Several strategies can help improve your LVR position, potentially saving thousands in LMI costs and accessing better loan terms.

• Save a larger deposit to reach 80% LVR threshold
• Consider guarantor support from family members
• Choose a lower-priced property within your budget
• Obtain professional property valuation if you believe property worth more
• Make property improvements before valuation (with caution on cost vs benefit)

LVR considerations for refinancing

Your LVR can improve over time through loan principal repayments and property value increases, potentially enabling better refinancing terms and elimination of ongoing costs.

Property value growth and loan principal reductions naturally improve your LVR over time. When refinancing, improved LVR may eliminate LMI requirements and provide access to better interest rates and loan features.

LMI exemptions and alternatives

Some borrowers can access high LVR loans without standard LMI requirements through professional packages or alternative arrangements.

Professional package exemptions: Certain professionals including doctors, lawyers, accountants, and other qualified professionals may access LMI waivers or reduced requirements up to 90-95% LVR.

Government guarantee schemes: First home buyer guarantee schemes eliminate LMI requirements for eligible buyers, allowing access to high LVR loans without additional insurance costs.