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What is loan-to-value ratio?

Find out what loan-to-value ratio (LVR) is, how to calculate it, and why it’s important when you’re applying for a home loan.

 

Why LVR is important with a home loan application

Loan-to-value ratio (LVR) is a key calculation with a home loan application to buy a property. It shows the ratio of the value of your property to the size of your loan as a percentage. Banks commonly use LVR to assess the risk of a loan, with a higher LVR representing a higher risk to the lender.
 

Having an LVR of 80% or lower may help you borrow more at lower rates and with lower repayments. If you have an LVR of more than 80%, you may need to pay Lender’s Mortgage Insurance or ask a family member to act as a guarantor to offset the risk.

 

How to work out LVR

A simple calculation

LVR is calculated by the amount you are borrowing, divided by the bank’s valuation of the property, multiplied by 100. So the bigger your deposit, the lower the LVR will be. It’s important to note that a bank’s valuation may not be the same as the market value (see below).

When working out how much you have for a deposit, there may be other upfront costs to consider, such as legal fees, stamp duty and LMI. Find out more about other upfront costs.

An LVR example

Kerry and Srikanth want to buy a property with a bank valuation of $1,000,000. They have a deposit of $100,000, so need to borrow $900,000. This means the LVR is 90%. Here is how the calculation works:

  • Divide $900,000 by $1,000,000 to get 0.9
  • Multiply by 100 to get a percentage (0.9 x 100 = 90%)
  • The LVR is 90%.

 

Difference between a bank valuation and market valuation

When deciding whether to offer you a home loan and what the rate of interest should be, a lender will use a bank valuation of the property to calculate the LVR.

Bank valuation of a property

A professional valuer performs a bank valuation. It may be different than estimated market value provided by a real estate agent, because the bank has to ensure that they don’t lend more than the property’s true value.
 

The bank valuation is an estimate of what the lender might be able to recover from the sale of the property in the event that the borrower was no longer able make repayments on the home loan.

Market estimate of a property

A market estimate (or market valuation) is an estimate of how much the home will sell for in the Australian property market. Your real estate agent may base a market estimate on recent sale and purchase prices – rather than long-term trends. An estimate may also assume that the seller is willing to wait to get the best price.

What happens when LVR exceeds 80%?

When LVR on a loan is more than 80%, a home buyer’s interest rate may be higher. They are also likely to need to pay for Lender’s Mortgage Insurance (LMI). LMI allows you to buy a home sooner if you have a high LVR. In many cases the cost of LMI can be included in the amount you borrow, so you won’t need to pay it up front.

How LMI works

LMI protects the lender if the borrower can’t meet their home loan repayments. If this happens, the property securing the loan will need to be sold so that the bank can recover the debt. But sometimes the sale price of a property won’t be enough to pay what’s owed – which is when LMI covers the difference.

Interest rates and other high LVR challenges

In addition to paying LMI, there are some downsides associated with high LVR loans:

  • Higher interest rates – the lender will often charge higher interest rates to offset the higher risk of lending. (Of course interest rates are subject to change).
  • Higher repayments – a higher interest rate means higher repayments, which can be further increased when LMI is added to your loan amount. Use our repayment calculator to estimate your repayments and our affordability calculator to see what you could afford to borrow.
  • Application scrutiny – with a high LVR, an application may be scrutinised more closely to make sure the home buyer is able to cover regular repayments.

How to reduce LVR

Build your deposit

A way to reduce LVR is to continue saving until you have a larger deposit. Saving more aggressively for a period to reduce your LVR to less than 80% means you could get a home loan at a lower interest rate and avoid having to pay LMI. Buying a less expensive home to get a foothold in the real estate market is another way to lower LVR.

Get help from family

With Westpac’s Family Security Guarantee, a member of your family may be able to act as guarantor, using the equity in their home to help you buy your home sooner and without the extra cost of LMI. Not paying LMI premiums will help you to reduce your LVR.

To sum up

  • LVR is the ratio of your loan amount to the value of the property you’re buying, shown as a percentage.
  • LVR is the home loan amount, divided by the bank’s property valuation, multiplied by 100.
  • An LVR over 80% is likely to result in the home buyer paying LMI and a higher interest rate on repayments.
  • LMI protects the lender against financial loss, not the borrower.
  • You can avoid LMI if a family member guarantees the home loan. However, the guarantor needs to consider the risks associated with this, primarily that they are liable for the amount of the guarantee if you default on the loan.

Keep exploring

Stamp duty and LMI calculator

Calculate upfront costs when buying a property, such as stamp duty and Lender's Mortgage Insurance (LMI).

 

Lenders Mortgage Insurance

For those with deposits less than 20% of the property’s value, Lenders Mortgage Insurance can help you.

 

How to buy a home

From getting your deposit together to settlement day – Westpac can help you every step of the way. 

 

 

Things you should know

Credit criteria, fees, charges, T&C's apply. These may change or we may introduce new ones in the future. Full details are available on request. Lending criteria apply to approval of credit products. The guarantor should consider the risks associated with Parental Guarantee, primarily that if the borrower defaults on their loan, the guarantor is liable to pay up to the maximum of the portion of security they have put forward as a guarantee. Westpac advises guarantors obtain independent legal advice.