Loan-to-value ratio (LVR) is your home loan amount as a percentage of the property value your lender accepts. To calculate LVR, divide the loan by that value and multiply by 100. For a purchase, lenders generally use the lower of the purchase price and their valuation.
Your LVR affects the rates available and whether lenders mortgage insurance (LMI) applies. A small difference in valuation can move a loan across a pricing or insurance threshold.
How LVR is Calculated
The LVR formula is (loan amount / property value used by the lender) x 100.
In a hypothetical example, a $400,000 loan against a $500,000 valuation has an LVR of 80%: $400,000 / $500,000 x 100 = 80%.
The value used changes the result. Suppose you buy for $480,000 and the lender values the property at $500,000. Under the usual lower-of-price-and-valuation rule, the lender uses $480,000. A $400,000 loan therefore has an LVR of about 83.3%, rather than 80%.
AMP's LVR explanation confirms this lower-of rule. If the valuation is below the purchase price, the lower valuation increases your LVR for the same loan amount.
To find your LVR on an existing loan, divide your current loan balance by a current property valuation, then multiply by 100. For example, a $360,000 balance against a $600,000 valuation gives 60% LVR. Use your lender's accepted valuation for a refinance or pricing assessment, because an online estimate can differ.
What LVR Changes
LVR affects your interest-rate tier, LMI costs and the lender's assessment of the security. It does not establish whether your income can cover the repayments.
ANZ's published rate tables distinguish LVR bands including 60%, 70%, 80% and higher bands for some products. Westpac's rate page includes a 0.10 percentage point annual discount in its listed eligible rates for new loans at up to 70% LVR. Lower bands can therefore earn sharper pricing, but the product and its conditions still matter.
Above 80% LVR, most lenders require LMI, which protects the lender if a borrower defaults and the sale leaves a shortfall. The guide to LMI costs and exceptions explains that expense separately.
The 80% trigger is a market convention, not a legal requirement to buy insurance. Some products or eligible borrowers can go above 80% without LMI. LMI can also apply below 80% under particular lending policies, so a low LVR alone does not guarantee an exemption.
Which LVR Counts as Good
An LVR of 80% or less is a useful target because it avoids LMI at most lenders. An LVR of 70% or 60% can put a borrower in a lower pricing band on some products.
The right LVR depends on your deposit, the loan's purpose and the cash buffer left after settlement. Spending every available dollar to reach a lower band can leave you short for repairs or unexpected expenses. Compare the rate and insurance savings with the cash you would give up.
A low LVR also cannot fix an unaffordable loan. The lender still assesses your income, expenses and other debts.
Reducing a Marginal LVR
A larger deposit or a higher accepted valuation lowers LVR. A family guarantee can add security, while a government guarantee can remove LMI without reducing the amount you owe.
- Increase the deposit if you can keep a suitable cash buffer. At a $500,000 accepted value, reducing the loan from $410,000 to $400,000 moves LVR from 82% to 80%. Allow separately for purchase costs.
- Check the valuation before lodging. Where suitable lenders allow upfront valuations, compare their accepted results. A higher valuation only helps a purchase to the extent the lender's purchase-price rule permits it.
- Consider a guarantor home loan using family equity. Westpac's Family Security Guarantee lets an eligible family member provide property equity or cash as additional security. The guarantor is liable for the guaranteed amount and can lose their home if it secures the guarantee. Westpac requires independent legal and financial advice.
- Assess the Australian Government 5% Deposit Scheme. Eligible first home buyers can use a minimum 5% deposit, with a minimum 2% for eligible single parents or legal guardians, without LMI. The guarantee protects the lender and leaves the borrower responsible for repayments. Our low-deposit home loan guide explains this option.
The Scheme has location-specific property price caps. Use its official property price cap tool for the buying location. The Scheme FAQs explain the deposit and eligibility rules. A government guarantee does not turn a 95% loan into an 80% loan.
Where Regulation Actually Sits
No single consumer-loan rule fixes every lender's LVR calculation or makes 80% the universal approval limit. Lenders set credit policies within applicable regulatory requirements. APRA's prudential standards require banks to have valuation processes and limits on LVR.
The APRA requirement brokers encounter most often is the serviceability buffer. Under APS 220 Credit Risk Management, banks generally assess residential mortgage repayments at least three percentage points above the loan rate, ignoring temporary introductory discounts. This tests repayment capacity, while LVR measures the debt against the security.
A borrower can therefore satisfy a lender's LVR limit and still fail its serviceability assessment. A higher-LVR loan can face both LMI costs and the same repayment-capacity test.
Your Next Step
For an application between 78% and 85% LVR, have your broker compare two suitable lenders' upfront valuations before choosing a lender, where available. Recalculate LVR using each lender's accepted value and purchase-price policy.
Compare the resulting rate, any LMI and the cash needed at settlement. Choose a loan that fits your repayment capacity and cash buffer, even if a different option has a lower headline LVR.
