Loan-to-value ratio (LVR) calculator

Your loan-to-value ratio (LVR) is a percentage used to express your home loan amount relative to the total value of the property you bought with your home loan.

LVR comes into play primarily during the home loan application process when you ask lenders for a loan of a certain size to help purchase a property of a certain value (pending bank valuation of the property).

The lender can look at the size of the requested loan relative to the value of the property and use that ratio (among other factors and lending criteria) to help them decide whether you’re a low or high risk to lend money to.

Note that your LVR is solely based on the size of your home loan, and is not necessarily indicative of your merits as a borrower or your borrowing power.

To demonstrate how LVR is calculated, let’s imagine you want to take out a $400,000 home loan to buy a house valued at $500,000. The loan represents 80% of the property’s value, meaning this hypothetical home loan would have an LVR of 80%.

For this example, we’ve excluded upfront homebuying costs like legal fees, stamp duty and lenders mortgage insurance (LMI). However, these expenses can affect how much you might need to borrow, and subsequently your total homebuying costs – so we recommend keeping them in mind when assessing your own financial situation.

It’s worth noting that your LVR can be affected by factors beyond your control over the life of your loan – if the property market shifts, the change to your property’s value will affect your LVR. If property prices go up, your equity will increase and your LVR will decrease. Conversely, if the property market slumps and the value of your property decreases, your equity will decrease and your LVR will increase.

While there’s typically no such thing as a ‘good’ or ‘bad’ LVR, you can safely assume that a lower LVR and a larger deposit will usually pose less risk to both you and the lender – some lenders will even have lower interest rates on offer for borrowers with LVRs below a certain percentage. That being said, you’ll generally want to aim for an LVR of 80% or lower in order to avoid paying LMI.

The higher your LVR is, the higher risk you pose as a borrower. Lenders mortgage insurance (LMI) is designed to protect the lender if you’re unable to repay your loan (also known as defaulting). Although forgoing a larger deposit and paying this fee may help you get into the market quicker, it can also make your home loan noticeably more expensive. If you want to avoid LMI, you can always choose to hold off and save a bigger deposit so you end up with an LVR of under 80%.

An LVR higher than 80% will typically necessitate you paying LMI, unless you’re eligible for a profession-specific LMI waiver or you’ve been approved for one of the three Australian Government Home Guarantee Schemes: the First Home Guarantee (FHBG), Regional First Home Buyer Guarantee (RFHBG) and the Family Home Guarantee (FHG).

You could also avoid paying LMI by having a family member go ‘guarantor’ on your home loan. Typically, the way this would work is that a family member would become your guarantor and put up the equity they’ve built in their own home as additional security against your loan.

This could help you avoid paying LMI by ‘guaranteeing’ to the lender that someone will pay off the home loan if you can’t.

However, the bank still needs to do their due diligence and make sure that your guarantor has sufficient equity in their own home (i.e. they’ve paid off enough of their own mortgage) and the financial means to take over your home loan if needed.

Keep in mind that a guarantor becomes wholly and solely responsible for your home loan repayments if you can’t pay, so you should carefully consider this option. A default on your part could cause difficulties for your guarantor(s).

Your LVR can have a direct impact on the interest rate your lender offers you. Those borrowing a smaller percentage of their property’s value may receive more favourable interest rates because of the lower risk they pose. Conversely, riskier loans with higher LVRs may incur a higher interest rate.

If you entered your loan with an LVR greater than 80%, you may want to consider refinancing when you’ve repaid enough of the loan for its LVR to drop below 80%. This is because refinancing with a lower LVR could potentially help you lock in a lower interest rate, either from the same lender or a new one.

This, in turn, will typically reduce the size of your home loan repayments. When refinancing, your lender may re-assess the value of the property to check its current property price, as the original purchase price or market value may no longer be accurate.

It’s important to note that if you refinance with an LVR of more than 80%, you’ll most likely be starting your LMI payments from scratch with your new lender, as LMI isn’t transferrable from one lender to another. If this is the case, you may decide that refinancing isn’t financially advantageous for you at the moment.