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:
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.
"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.."
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.
| Property value | Loan amount | Deposit | LVR |
|---|---|---|---|
| $500,000 | $400,000 | $100,000 (20%) | 80% LVR |
| $500,000 | $425,000 | $75,000 (15%) | 85% LVR |
| $700,000 | $490,000 | $210,000 (30%) | 70% LVR |
| $700,000 | $630,000 | $70,000 (10%) | 90% LVR |
| $900,000 | $810,000 | $90,000 (10%) | 90% LVR |
| $900,000 | $720,000 | $180,000 (20%) | 80% LVR |
| $1,000,000 | $950,000 | $50,000 (5%) | 95% LVR |
| $1,000,000 | $800,000 | $200,000 (20%) | 80% 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:
Once you have those 2 numbers, you can work out your equity and determine your current loan to value ratio. Here's an example:
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%.
| Response | 45-54 yrs | 35-44 yrs | 25-34 yrs | 18-24 yrs |
|---|---|---|---|---|
| Government grant | 0.97% | 1.18% | 1.46% | |
| Other | 0.97% | 0.49% | ||
| LMI | 1.97% | 1.94% | 2.86% | |
| Guarantor | 0.79% | 0.49% | ||
| Lender offer (E.g. essential worker loan,green energy loan) | 0.79% | 0.49% | 2.86% |
Lenders prefer that borrowers own at least 20% of a home's value, as this gives them the peace of mind that the property could be sold in any market, and after all selling costs, they will still recoup their full loan amount.
When you have a deposit of less than 20%, the lender requires you take out insurance to protect them in case you stop paying your home loan. This is called Lenders Mortgage Insurance.
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:
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%
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.
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