Loan to Value Ratio (LVR) and how it can affect your home loan

Loan to Value ratio (LVR) is an important calculation when it comes to your home loan. It’s the calculation of the amount of your home loan (what you want to borrow to buy it) relative to the bank valuation of the property you are looking at purchasing. Your loan amount, property purchase price and bank valuation are the key factors in determining your LVR.

Your bank will use the LVR calculation as one of the inputs to assessing the risk of lending to you.  A high LVR means higher risk for your bank, because you’re borrowing more of the purchase price; a lower LVR obviously means less risk. 

Again, your LVR could affect your borrowing power. The lower you can get your LVR, the more borrowing power you are likely to have; and potentially, you might be able to borrow more at a lower interest rate. So a low LVR is a good thing.

If your LVR is more than 80%, you may still be able to get a home loan for the property, but it’s very likely you will need Lender’s Mortgage Insurance too. More about that shortly.

Also, bear in mind that the bank valuation of the property may differ slightly from the market value of the property. Bank valuations are often more conservative, as the bank is concerned with what the sale price would realistically be if the property had to be sold in the event a borrower could no longer make home loan repayments on it. This could be different from what a real estate agent might advise the property could fetch on the property market.

Work out your LVR

You can work out your own LVR with a simple calculation. It’s the amount you want to borrow, divided by the bank valuation of the property, times 100, so your LVR is expressed as a %.  

Here’s an example.

Let’s say Sarah and Raj have seen a home they love, they’ve told their bank about it, and the bank valuer has valued the property at $800,000. Sarah and Raj have been saving hard for a home, and they have a deposit of $200,000, so they need to borrow $600,000. That makes their loan to value ratio (LVR) 75%. It’s calculated like this;

$600,000 (Amount Raj and Sarah need to borrow) /$800,000 (bank valuation) = .75*

.75 x 100 (to get a %) = 75% LVR.

*In this example, we assume that this amount is inclusive of all upfront costs, including fees and charges at settlement.

As their LVR is below 80%, Sarah and Raj would probably not need to take out Lender’s Mortgage Insurance, which reduces their loan costs. 

Lender’s Mortgage Insurance (LMI) protects the lender

Lender’s Mortgage Insurance is a common addition to a home loan, typically for first home buyers, who want to borrow more than 80% of the value of the property, or, to put it another way, when their deposit is less than 20% of the property’s value.

It’s an insurance premium the borrower pays which protects the lender against any loss if the borrower (sadly) can’t repay their home loan. If that happens (and as a last resort), then usually the property is sold, and the bank gets the proceeds of the sale to recover the unpaid home loan. Sometimes the bank is still owed money on the original loan after the property sale, and that’s what the Lender’s Mortgage Insurance covers.

A higher LVR (over 80%) often means higher interest rates

Any home loan is a risk for the bank, as it relies on the borrower to repay the loan (usually in instalments); these are your mortgage payments. But when the bank is lending more than 80% of the purchase price, the risk is obviously higher, which is why the bank will require LMI. 

A lender may also charge a higher interest rate on your home loan to reduce the loan risk. This means monthly or fortnightly home loan repayments on a high LVR loan will also be higher, so it’s always best to have as much of a deposit as possible, to reduce your home loan payments and possibly avoid having to include LMI.

Be aware of other upfront costs

When you’re buying your first (or any) home, consider the other costs you’ll likely incur, such as government fees and stamp duty, council rates, loan application fees, conveyancing and property inspection costs and removal fees. These are in addition to any Lender’s Mortgage insurance you may need. To get an idea of what these costs are, use our helpful upfront and ongoing costs calculator.  

Reducing your LVR

How to avoid paying LMI

Like Raj and Sarah above, saving as much as you can to put towards your new home is a good idea. Ideally, you’ll want to get under the 80% LVR calculation. Work out what you might be able to afford to borrow using this borrowing power calculator. 

Where your LVR is over 80%, asking a family member to guarantee part of your home loan to an agreed amount can reduce your LVR to under 80%. That means you’ll avoid having to take out LMI. With a RAMS home loan, your guarantor is only liable for the amount they agree to guarantee, not the full home loan amount. RAMS Fast Track allows you to do exactly this.

If you do need LMI

The good news is, as a RAMS borrower, your LMI is built into your home loan, so you don’t pay it upfront as one cost, (but of course it does increase the interest component over the term of your home loan).

Even better, if you choose RAMS as your home loan specialist, and you’re a first time buyer, it’s possible to get up to $20,000 off your LMI** which is quite a saving!

**Terms, conditions and limitations apply. Credit criteria, fees and charges apply. Residential lending is not available for Non-Australian resident borrowers.  Apply by 31 March 2024, settle by 31 July 2024.
*Offer available for eligible Owner Occupier First Time Buyers approved for their first home loan with loan to value ratio (LVR) greater than 80% and up to 95% including LMI premium at time of formal approval.
LVR is the amount of the customer’s loan compared to the Bank’s valuation of the property offered to secure the loan, expressed as a percentage. First Time Buyers are applicants applying for their first home loan for their first property. For joint applications, at least one applicant must be a First Time Buyer. Available on New Owner Occupier & Investment loans with Principal & Interest repayments. Not available on Interest Only repayments. Offer current as of 7 December 2023. Offer may be varied or withdrawn at any time. Min loan size of $250k. Max one security property per application. Excludes Line of Credit, Constructions Loans which remain on Interest Only repayments after completion of the initial Interest Only period, Land Only Loans, RAMS Fast Track home loans, company and trustee borrowers, refinances, and switches and refinances of home loans within the Westpac Group which includes RAMS, St. George, Westpac, Bank of Melbourne and BankSA. Offer not available in conjunction with RAMS New Purchase Buyer $1,000 Rebate offer. Lender’s Mortgage Insurance premium will be reduced for eligible customers up to a max of $20,000 with a premium of at least $1 payable for LMI by the customer. This will be reflected within the Home Loan Agreement. Where the LMI premium is more than $20,000, RAMS will pay $20,000 towards the premium. The balance of the LMI premium will be payable by the customer. LMI subject to approval and customer must adhere to LMI obligations during the loan agreement. Funds to cover transaction costs are required. This information does not take into account your personal circumstances.