LVR, loan-to-value ratio, is one of those bits of finance jargon that quietly controls a lot about your borrowing options.
View all PostsLVR, loan-to-value ratio, is one of those bits of finance jargon that quietly controls a lot about your borrowing options, and most people only really learn what it means once it's already affecting their approval. Here's the plain version.
It's worth learning early because LVR doesn't just decide whether you're approved. It decides what the loan costs, whether an insurance premium gets attached to it, how much cash you need at settlement, and which lenders will look at the deal at all. On an investment purchase it does all of that with slightly tighter policy than on a home you'd live in.
LVR is the loan amount expressed as a percentage of the property's value. Borrow $720,000 on a property worth $800,000, and your LVR is 90%. The lower your LVR, the more equity or deposit you're bringing to the table, and generally the more favourable your terms.
Not necessarily the price you paid. Lenders work from their own valuation, and where the valuation and the contract price differ they generally use the lower of the two. That's how a deal that looked like an 88% LVR on paper turns into a 92% one after the valuer's report lands.
The gap gets closed with cash, not argument. If the valuation lands under the contract price you either put in more of your own money, accept a higher LVR, or ask another lender to value it, which means another application.
A higher LVR means more risk for the lender. If property values dip and they need to sell to recover the loan, there's a thinner buffer. That's why:
Pricing usually moves in steps rather than smoothly. Lenders group borrowers into LVR bands, so the difference between 81% and 79% can be worth more than the difference between 79% and 65%. If you're sitting just above a band, it's worth knowing exactly where the line is before you decide the extra cash isn't worth finding.
To land at an 80% LVR and avoid LMI on an $800,000 property, you'd need a $160,000 deposit (or equivalent equity from another property). That's a big ask for a lot of buyers, which is exactly why LMI exists. It lets you borrow at a higher LVR by paying a premium instead of waiting to save the full 20%.
The deposit isn't the whole cash requirement, and this is where budgets come unstuck. Your LVR is calculated against the property value, so none of the purchase costs are covered by the loan. They come out of your pocket on top.
Work out the full cash figure before you set a price limit, not after. A deposit that lands you at exactly 80% and leaves nothing for stamp duty isn't an 80% deal, it's a deal you can't settle.
It's insurance, and you're not the insured party. If the lender has to sell the property and recovers less than the outstanding debt, the insurer covers the lender's shortfall, then can pursue you for it. That surprises people, so it's worth saying plainly.
The premium isn't a flat percentage. It scales with the loan size and the LVR, and it climbs steeply as the LVR rises. Different lenders use different insurers and different scales, so the same deal can carry a very different premium at two lenders quoting similar rates.
You can usually either pay it at settlement or capitalise it, which means adding it to the loan. Capitalising keeps cash in your pocket and increases the balance you pay interest on for the life of the loan. It also lifts your LVR, so a loan sitting right on a policy cap can be pushed over it by the premium itself.
LMI generally isn't portable either. Refinance to another lender while still above their threshold and you're usually paying a new premium, not transferring the old one. Some insurers offer a partial refund if the loan is repaid soon after settlement, but the terms vary and it isn't something to count on.
If you already own property, you may be able to use the equity in it as part or all of your deposit on a new purchase, rather than saving cash from scratch. Lenders will generally still assess the combined LVR across both properties, so it's not unlimited borrowing power, but it can significantly speed up getting into a second property.
Usable equity isn't the same as equity. Equity is what the property is worth less what you owe. Usable equity is what a lender will actually release, which is the value multiplied by their maximum LVR, less the existing debt. If a lender will go to 80% on a property valued at $600,000 with $300,000 owing, the usable equity in that illustration is $180,000, not $300,000. The numbers are invented and round to make the arithmetic visible.
Two practical notes. Releasing equity means a new valuation on the property you already own, and a valuation that lands lower than you hoped takes the plan with it. There's also a structural choice. Cross-securitising both properties under one lender is simple to arrange and harder to unwind, because selling one later means the lender reassesses the whole position. Keeping the release as a separate split, each property on its own security, usually leaves more room to move. Ask which structure is being proposed rather than finding out at sale time.
LVR gets you into the conversation. Serviceability decides how it ends.
Two of those catch investors out. Lenders apply a rate buffer on top of the actual rate when they test whether you can afford the repayments, and that buffer applies to your existing home loan as well as the new one. Its size comes from regulatory guidance and lender policy and it changes over time, so ask what's being applied at the time you apply. Lenders also shade rental income rather than counting all of it, and they don't assume any tax benefit from negative gearing in the way some investors do in their own spreadsheets.
The numbers below are invented and deliberately round, and they're illustrative only. They're not a rate, a premium or a policy from any lender.
Say you're buying an investment property at $500,000. With a $100,000 deposit your LVR is 80% and no LMI applies. With a $50,000 deposit your LVR is 90%, a premium gets added, and if that premium is capitalised, your loan balance starts higher than the amount you borrowed to buy the place. You've also moved into a band where the rate on offer may be higher, so you're paying more interest on a larger balance for the whole term.
The lower LVR option costs you time while you save the difference. The higher one costs you money and gets you in sooner. Both are defensible. What's not defensible is picking one without doing the subtraction.
Yes, in both directions. It falls as you pay the loan down, and it moves with the property's value, which can go either way. If a later valuation puts you comfortably under 80%, that can open up sharper pricing or a refinance without a new premium. It doesn't refund the premium you already paid, because that one is spent.
No. Pre-approval is a conditional indication based on an estimated property value, because there's usually no property yet. Formal approval is the unconditional offer against a specific property after a real valuation, and that's the point where your LVR becomes a fact rather than an assumption. A valuation under the contract price at that stage raises the LVR and the cash you need, which is the single most common way an investment purchase gets uncomfortable late.
It can be, and that's a judgement rather than a rule. A higher LVR costs more in premium and usually in rate, but it keeps cash available for the costs that follow a purchase. It also concentrates risk, because a thinner buffer means a fall in value hits your position harder. That weighing up is yours to do, ideally with your accountant.
Working out your real LVR takes a few actual numbers rather than estimates.
A higher LVR gets you into the market sooner but usually costs more. Through LMI, a higher rate, or both. A lower LVR costs more time (or requires more existing equity) but saves money over the life of the loan. Neither is automatically "right". It depends on how much the opportunity cost of waiting matters against the extra cost of borrowing more now.
Compare City runs investment lending across our panel so you can see exactly what your LVR does to your rate and costs before you commit either way.
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