Loan-to-Value Ratio (LVR) is one of the most critical steps when securing a mortgage and learning how it can affect while buying a property is the second layer of learning about lvr. What is LVR actually? LVR is the percentage of a property’s value that you borrow compared to its assessed market value.
A lower LVR (typically 80% or below) generally means lower risk for lenders, lower interest rates, and no requirement to pay Lenders Mortgage Insurance (LMI). However, several key factors can shift your LVR higher or lower during the home-buying process.
Key Factors That Affect Your LVR
- Bank Valuation vs. Purchase Price: Lenders calculate LVR based on their independent valuation of the property, not necessarily the agreed purchase price. If you buy a home for $600,000 but the bank values it at $550,000, your LVR will be calculated against the lower figure, increasing your ratio.
- Size of Your Cash Deposit: The higher your initial deposit, the less money you need to borrow, which directly lowers your LVR.
- Capitalized Fees (e.g., LMI): If your deposit is under 20% and you choose to capitalize (add) LMI into the total loan balance rather than paying it upfront, your total loan amount increases—raising your overall LVR.
- Property Type and Location: Lenders assign lower LVR caps (often 70% to 80%) to higher-risk property types, such as small studio apartments, commercial properties, or homes in high-density or regional areas.
- Market Volatility: Fluctuations in the local housing market between the time you make an offer and when the lender completes the appraisal can affect the property’s assessed value.
- Use of Financial Guarantors: Utilizing a family guarantee can lower your effective LVR by securing a portion of the loan against additional equity, helping you bypass LMI.
How LVR Impacts Your Mortgage
| LVR Range | Risk Level | Common Impact |
| 80% or Less | Low Risk | Best interest rates, minimal paperwork, no LMI required. |
| 81% to 90% | Moderate Risk | LMI required, standard interest rates, stricter income checks. |
| Over 90% | High Risk | High LMI costs, strict lending criteria, potential rate surcharges. |
Tips to Improve Your LVR Before Applying
- Save a Larger Deposit: Aim for a 20% deposit to avoid LMI and secure lower interest rates.
- Account for Purchase Costs: Ensure legal fees, stamp duty, and inspection costs are paid out-of-pocket so they do not reduce your actual deposit pool.
- Research Comparable Sales: Ensure your purchase price aligns with recent sales in the neighborhood to avoid a low bank valuation gap.
