When applying for a home loan in Australia, one of the most important metrics lenders consider is your Loan-to-Value Ratio, commonly known as LVR. This crucial figure influences not only whether you will be approved for a mortgage but also the interest rate you will pay and whether you will need to purchase Lenders Mortgage Insurance. Understanding LVR is essential for anyone looking to enter the Australian property market or refinance an existing home loan.
What Exactly Is Loan-to-Value Ratio?
The Loan-to-Value Ratio represents the percentage of a property's value that you are borrowing from a lender. It is calculated by dividing your loan amount by the property's appraised value, then multiplying by 100 to get a percentage. For example, if you are purchasing a home valued at $800,000 and borrowing $640,000, your LVR would be 80 percent.
This ratio is significant because it tells the lender how much equity you have in the property from the outset. A lower LVR means you have contributed a larger deposit, which reduces the lender's risk. Conversely, a higher LVR indicates you are borrowing a greater proportion of the property's value, which increases the risk that the lender may not recover their funds if you default and property values decline.
How LVR Affects Your Home Loan Options
Interest Rates and LVR Tiers
Australian lenders typically structure their interest rates based on LVR tiers. Borrowers with lower LVRs generally receive more favourable interest rates because they represent lower risk. The common LVR tiers used by most Australian lenders include loans up to 60 percent LVR, which often receive the best rates, followed by 60 to 70 percent, 70 to 80 percent, and above 80 percent where rates increase and additional requirements apply.
The difference in interest rates between tiers can seem small on paper, perhaps 0.1 to 0.3 percent, but over the life of a 30-year mortgage these differences translate to thousands of dollars in additional interest payments. This is why reaching a lower LVR tier, even if it requires saving for a slightly longer period, can be financially beneficial in the long term.
Lenders Mortgage Insurance Requirements
One of the most significant implications of having an LVR above 80 percent is the requirement to pay Lenders Mortgage Insurance. LMI is a one-off insurance premium that protects the lender, not the borrower, in case of default. Despite not benefiting the borrower directly, the cost is passed on to you and can add tens of thousands of dollars to your loan.
| LVR Range | Approximate LMI Cost | On $500,000 Loan |
|---|---|---|
| 80% or less | $0 (No LMI required) | $0 |
| 81% - 85% | 1.0% - 1.5% | $5,000 - $7,500 |
| 86% - 90% | 2.0% - 2.5% | $10,000 - $12,500 |
| 91% - 95% | 3.5% - 4.5% | $17,500 - $22,500 |
Calculate Your LVR Impact
Use our free Australian home loan calculator to see exactly how different deposit amounts affect your LVR, monthly repayments, and total interest paid over the life of your loan.
Strategies to Achieve a Better LVR
Saving a Larger Deposit
The most straightforward way to improve your LVR is to save a larger deposit before purchasing. While this requires patience and discipline, the benefits extend beyond avoiding LMI. A larger deposit means borrowing less money, which translates to lower monthly repayments, less total interest paid, and greater equity in your home from day one. Consider using high-interest savings accounts, term deposits, or the First Home Super Saver Scheme to accelerate your deposit savings.
Guarantor Loans
Another option available to some borrowers is using a family guarantee. In this arrangement, a family member, typically a parent, uses equity in their own property as additional security for your loan. This can effectively reduce your LVR from the lender's perspective, allowing you to avoid LMI even with a smaller cash deposit. However, guarantor arrangements carry significant responsibilities and risks for the guarantor, so all parties should seek independent legal and financial advice.
Government Assistance Schemes
The Australian government offers several schemes to help eligible borrowers purchase homes with lower deposits without paying LMI. The First Home Guarantee allows first home buyers to purchase with as little as 5 percent deposit, with the government guaranteeing up to 15 percent of the loan. Similar schemes exist for single parents and regional home buyers. These schemes effectively allow you to borrow at a higher LVR while avoiding the LMI cost that would normally apply.
LVR Considerations When Refinancing
LVR remains important even after you have purchased your home. When refinancing your existing mortgage, lenders will recalculate your LVR based on the current property value and your remaining loan balance. If property values have increased significantly since your purchase, your LVR may now be much lower than it was originally, potentially qualifying you for better interest rates.
Conversely, if property values have declined, your LVR could be higher than expected, which may limit your refinancing options or result in higher rates. This is particularly relevant in market downturns or for properties in areas with volatile values. Before refinancing, it is worth obtaining a current property valuation to understand where you stand.
Understanding LVR Caps and Restrictions
Most Australian lenders have maximum LVR limits, typically around 95 percent for owner-occupied properties and lower for investment properties, often capped at 80 to 90 percent. Some lenders may further restrict high-LVR lending for certain property types, locations, or borrower profiles. Understanding these restrictions before you begin your property search can save disappointment and help you focus on realistic options given your deposit size.
Calculate Your Home Loan Repayments
See how your deposit size affects your LVR, monthly repayments, and total loan cost with our comprehensive Australian home loan calculator.
Use Calculator NowConclusion
The Loan-to-Value Ratio is a fundamental concept that every Australian home buyer and property investor should understand. It directly impacts your borrowing costs through interest rates and LMI premiums, and influences which loan products and lenders are available to you. By focusing on achieving the best possible LVR through strategic saving, exploring guarantor options, or utilising government schemes, you can minimise your borrowing costs and build equity faster.
Remember that while a higher LVR allows you to enter the property market sooner, it comes with additional costs that can significantly increase the total amount you pay over the life of your loan. Take time to calculate the true cost difference between borrowing now at a higher LVR versus waiting to save a larger deposit, and make an informed decision that aligns with your financial goals and circumstances.