What is loan to value ratio (LVR)?

Imagine you're pouring orange juice into a tall glass. If you pour the liquid in all the way to the tippy-top, it's 100% full. If you stop 3/4 of the way to the top, it's 75% full.

Now imagine that glass is your home loan, and the juice represents the outstanding balance. At the beginning, the cup is full. Every month, you may a repayment (take a tiny sip of juice) until eventually, one day, the glass is empty and no more debt remains.

That's an easy way to visualise it. In more official terms, loan to value ratio (LVR) is simply how much you are borrowing in relation to the value of your property. It works like this:

• Loan to value ratio is expressed as a percentage.
• If you have an LVR of 70%, you have a deposit or equity worth 30% and your loan is worth 70%.
• Every home loan has a maximum LVR, which indicates how big your deposit should be in proportion to the value of the property you are buying.

The higher your LVR, the less of the property you own – while a low LVR means you have a larger deposit and you're borrowing less (or if you already own the home, you have more equity). Understanding LVRs helps you compare home loans and find one that matches your deposit size, and help you avoid applying for a loan that isn't suitable.

Expert insight

"Essentially, this is a measure of the cents in the dollar you owe on your property. 80% LVR is equal to 80c of every dollar of house value – 80c for the bank and 20c for you. This is a measure of the equity in your property. Banks want to see that you have a strong equity position in order to lend you money, as well as a good income. Loan to Value ratio is one of the key drivers we assess when it comes to seeing what you can borrow. Sometimes we see clients that have really strong incomes, but maybe they have a small deposit or their property value has fallen so they can't borrow what they want. Sometimes LVR isn't as relevant to lending as others, say you are using a guarantee (family or Government) or you have a specific occupation that allows the lender to waive LMI and rate loadings, but as always before making any decisions, speak to your broker and evaluate your situation.."

Matt Turner

Managing broker, GSC Finance

How do I calculate my LVR?

Loan to value ratios are simple to calculate. You need two numbers: your property value and your loan amount (or deposit size).

Let's say you are buying an $800,000 property. Your deposit is $120,000, therefore your loan amount is $680,000.

Now you can determine the LVR percentage by dividing the loan amount by the property value. Here's how to calculate it:

Here are some examples in a table, using different property values and deposit sizes.

Example LVR calculations

How refinancers can calculate their LVR

LVR matters for refinancers too, but it's slightly different.

Instead of a deposit, you need to calculate your home equity. This is the value of your property minus your remaining home loan debt. Before you break out the calculator do the following:

• Work out the current value of your property. Don't use the price you paid for the property. Instead, estimate its current market value by looking at recent sales of similar properties in your area. You can get free property valuations through various real estate sites, or pay for a professional valuation.
• Check your remaining loan amount. Log in to your account and check how much is left on your home loan.

Once you have those 2 numbers, you can work out your equity and determine your current loan to value ratio. Here's an example:

• Your home is worth $800,000.
• You have $420,000 left to repay on your home loan.
• You have $380,000 in equity

Then you can work out your LVR: (420,000 ÷ 800,000) x 100 = 52.5%. With an LVR of 52.5%, a refinancer would likely be eligible for most home loans, given that so many home loans have a maximum LVR of 80%.

Finder survey: How did Australians of different ages secure a low deposit home loan?

What does 80% LVR mean?

What is the maximum LVR in Australia?

Take a look at any home loan in Australia and you will see two loan to value ratios listed alongside details like the interest rate and comparison rate. These are maximum LVR and maximum insured LVR.

The difference comes down to lenders mortgage insurance (LMI). This is a premium lenders charge to borrowers when there are deposits below 20% of a property's value. In other words, when the LVR is higher than 80%.

LMI can cost thousands of dollars, but it does help borrowers buy properties with smaller deposits. And this is why home loans have two LVRs.

The maximum insured loan to value ratio lets borrowers know if the loan is available with a deposit below 20%. The maximum LVR refers to the deposit size you will need without paying lenders mortgage insurance.

The maximum LVR on most Australian loans is 80% or less, but the maximum insured LVR can be 90% to 95%.

Here are 2 examples:

• Home Loan A. The loan has a maximum LVR of 80% and maximum insured LVR of 80%. You need a 20% deposit to get this loan and cannot pay LMI to get it with a smaller deposit.
• Home Loan B. The loan has a maximum LVR of 80% but the maximum insured LVR is 90%. You can get this loan with a 20% deposit and avoid LMI but you can also get it with a deposit between 10% and 19.99% of your property's value – you just need to pay LMI as well.

A lower loan to value ratio makes it easier to get a home loan

If your LVR is 90% and you apply for a home loan with a maximum insured LVR of 80% your application will be rejected or the lender will recommend a different product. That's why it's important to understand your deposit size.

The lower your LVR, the bigger your deposit is relative to your home loan. This makes it easier to get a home loan. As mentioned above, borrowers with low deposits (that is, deposits under 20%) usually have to pay lenders mortgage insurance.

Compare low deposit home loans with LVRs above 80%

You can use a guarantor to get a home loan with 100% LVR

A long time ago (well, before the 2008 Global Financial Crisis), lenders were actually giving some borrowers 100% of the value of a property. Those days are over, but there is an exception for some lucky borrowers: a home loan with a guarantor.

Many lenders will lend you above 95% if your parents own a property and are willing to act as your guarantor. This means they agree to be responsible for your mortgage (or part of it) if you can't repay your loan.

It's a risky option. In the worst case scenario a borrower defaults on their loan and the parents are forced to sell their own house to cover the debt. But if everyone involved in the arrangement understands the risks and gets independent financial advice it can work out well.

Using a guarantor lets you avoid LMI too.

Frequently asked questions

• Can you get a 100% home loan?

  Australian lenders won't lend you 100% of a property's value any more. It's just too risky. You'll need at least a 5% deposit to get a home loan, if not a full 20% deposit. There are only 2 ways to get something close to a true 100% home loan: Have a guarantor, or be creative with how you build your deposit.

• What actually is a 100% home loan?

  Every home loan has a maximum loan-to-value ratio (LVR). This is the amount you can borrow in relation to your property's value and your deposit size. In plainer terms, a maximum LVR just means a minimum deposit. It's how much you need to have saved as a deposit to get the loan.
  Many home loans have LVRs of 80%, meaning you need at least a 20% deposit. You can borrow 80% of your property's value. Here's an example:
  - You buy a property with a value of $800,000.
  - You have a 20% deposit of $160,000.
  - You borrow the remaining 80%, or $640,000.
  So a 100% home loan means the maximum LVR would be 100%. But these loans don't really exist any more

• Can I get a home loan with 95% or 100% LVR?

  While they aren't as common as loans with 80% to 90% maximum insured LVRs, you can find loans with 95% LVRs in Australia. These loans are available with just a 5% deposit, meaning you can jump into the property market with a much smaller deposit saved. Your LMI premiums will be quite high – likely tens of thousands of dollars – unless you qualify for an LMI waiver or you're a first homebuyer accessing the First Home Guarantee.

• Why won't lenders give you a 100% home loan any more?

  Having a deposit makes you a safer borrower in the eyes of lenders. It demonstrates your ability to save money, and suggests you are financially responsible enough to meet your ongoing mortgage repayments.
  There was a time when lenders might give you all the money you need to buy a house without a deposit. In a time when property prices are rising fast, some lenders felt it was safe enough to lend 100%. If you couldn't repay the loan, the lender could simply sell your property and recover the debt.
  But after the 2008 Global Financial Crisis, Australian banks tightened their lending criteria. The American financial collapse proved that if something goes wrong in the economy, property prices can fall at the same time borrowers can't afford to make repayments. Suddenly those homes aren't worth as much, and lenders can't recover their losses.
  By tightening their lending criteria, Australian banks and lenders are now better able to lend to people who can realistically afford to repay their loans. By limiting loan-to-value ratios below 100%, lenders can have more confidence that borrowers have some equity in their properties, making them better able to recover debts if the borrowers default on their mortgages.

Written by

Sarah Megginson

Head of editorial

As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio

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