LVR Explained: Loan to Value Ratio Guide for Australians

Loan to Value Ratio, or LVR, is one of the most important numbers in any property finance transaction. It directly influences the interest rate you are offered, whether you need to pay Lenders Mortgage Insurance (LMI) and how likely you are to be approved. Understanding LVR helps you negotiate better terms and structure your borrowing for the lowest possible cost.

What Is LVR and How Is It Calculated?

LVR expresses how much of a property's value is being borrowed. The formula is straightforward:

For example, if you are buying a property valued at $700,000 and you have a $140,000 deposit (20%), you need to borrow $560,000. Your LVR is ($560,000 / $700,000) x 100 = 80%.

An important nuance: the "property value" used in the calculation is the lender's valuation, not necessarily the price you pay. If you agree to pay $700,000 for a property but the lender values it at $680,000, the LVR is calculated on $680,000. This means your effective deposit is smaller and your LVR is higher than expected.

Why LVR Matters

LVR is a measure of risk for the lender. The higher the LVR, the less equity you have in the property and the greater the risk to the lender if you default and the property needs to be sold. This risk is reflected in three ways:

1. Interest Rate Tiers

Most lenders use LVR-based pricing tiers. The typical structure looks something like this:

These rate premiums are indicative and vary significantly between lenders. Some lenders have sharper pricing at high LVRs, which is why comparing across multiple lenders is critical.

2. Lenders Mortgage Insurance (LMI)

When your LVR exceeds 80%, most lenders require you to pay LMI. This is a one-off insurance premium that protects the lender (not you) if you default. LMI can cost anywhere from $2,000 to over $40,000 depending on the loan amount and LVR. It is usually capitalised into the loan, meaning you pay interest on it for the life of the loan.

3. Approval Likelihood

At higher LVRs (above 90%), lenders apply more stringent assessment criteria. They may require cleaner credit histories, higher incomes, no existing debts and stronger employment profiles. The maximum LVR also varies by property type — investment properties are typically capped at 90% LVR, while some specialised properties (rural, inner-city studios) may be capped at 70-80%.

How to Improve Your LVR Position

1. Save a larger deposit: The most direct way to lower your LVR. Each additional dollar of deposit reduces the amount you need to borrow.
2. Make extra repayments: If you already have a loan, making extra repayments reduces the principal and lowers your LVR over time. This can unlock better rates when you refinance.
3. Request a property revaluation: If your property has increased in value since you purchased it, a new valuation will lower your LVR. This is particularly useful when refinancing after a period of property growth.
4. Use a family guarantee: A parent can guarantee the deposit portion, effectively reducing your LVR to 80% without you needing to save the full 20%.
5. Consider a different property: Sometimes targeting a slightly less expensive property means the difference between 85% and 80% LVR, which eliminates LMI entirely.

LVR for Car Loans

LVR applies to car loans too, though it works slightly differently. Most car loan lenders will finance up to 100% of the vehicle's value, with some allowing up to 120% to cover on-road costs (registration, stamp duty, insurance). There is no LMI equivalent for car loans — instead, higher LVRs are reflected in the interest rate or loan conditions.

For car loans, providing a deposit (even 10-20%) significantly improves your approval chances and may unlock a lower rate, because it demonstrates savings discipline and reduces the lender's exposure to depreciation risk.