• Home loan terms and mortgage definitions

  • Loan to valuation ratio (LVR)

    The ratio of the amount lent to the valuation of the security (usually the house).

    The LVR measures the amount of the loan compared to the value of the property being used as security for the loan, expressed as a percentage figure. From a lender’s perspective, the higher the LVR, the higher the risk to the lender.

    Calculating the LVR

    The LVR is calculated by dividing the loan amount by the value of the property, then multiplying it by 100. The value of the property is determined by the lender’s valuer, and it may be different to the price actually paid for the property. As an example, if your property is valued at $250,000 and you borrow $200,000, the LVR would be 80% (200000 / 250000 x 100 = 80).

    LVR and borrowing

    The maximum LVR that you can borrow up to depends on several factors including the type of loan, the loan amount that you’re applying for and your capacity to make repayments. Generally, full doc loan applicants may be able to borrow up to 90% or 95% of the property’s value (ie. 90% or 95% LVR). Low doc loan applicants, typically self employed people can usually only borrow up to 80% of the property’s value. Lenders consider loans with an LVR over 80% to be of higher risk and borrowers will generally need to pay for Lender’s Mortgage Insurance. This protects the lender against any loss incurred if you default on the loan and the proceeds of an enforced sale are insufficient to clear the debt. 

    Borrowing with higher LVR

    Some people are keen to buy a home but do not have a 20% deposit. If you do not have a 20% deposit, you will generally have to pay Lender’s Mortgage Insurance. It may be possible to avoid paying lender’s mortgage insurance, provided you can find an eligible guarantor who is prepared to provide a limited guarantee, secured by a mortgage over their property. A guarantor is typically a family member who offers their own property as security for the new loan. Eventually, if the LVR reduces due to rising property values or extra repayments, and the borrower meets credit guidelines, the guarantor may apply to be released. For more information on this home loan option, check out RAMS Fast Track. This is subject to approval by the lender.