Above or below 80%: what is LVR and why is it important?

Let’s talk LVR.

This snappy little acronym is one of the most important things you should know if you’d like to buy or refinance a home. Why? It’ll help you understand how much you can borrow, how to get the best rate and what risks you might face when you borrow. That’s a lot for three little letters!

So let’s start with the basics of LVR; meaning, what is LVR and how to calculate LVR?

(If you’ve already got a good grip on the basics, scoot right ahead to find out what makes 80% loan to value ratio a magic number and what are the pros and cons of being above or below that mark.)

What does LVR stand for?

That’s easy – it’s an acronym standing for Loan to Value Ratio.

Ok, got that. But what is LVR?

It’s the percentage of what you borrow compared to the value of your home – the loan to value ratio.

Now the important part – how to calculate LVR

Working out your loan to value ratio is a simple equation. It’s your loan amount, divided by the appraised value of your home, multiplied by 100 (to make it a percentage). Let’s take a look at that in real terms.

You’ve just signed a contract for a home with $500,000 purchase price. You have $100,000 saved for the deposit (on top of all other costs like stamp duty, solicitor, fees, etc.), so you are planning on borrowing $400,000. You will be borrowing 80% of the purchase price, because $400,000 divided by $500,000, multiplied by 100 is 80%. Assuming the lender agrees that the value of the home is the same as the purchase price, that makes your LVR, or loan to value ratio, 80%.

Your property’s value is:

$500,000

$500,000

$500,000

Your deposit:

$100,000

$150,000

$50,000

Your LVR:

80%

70%

90%


If you have more or less than $100,000 set aside for the deposit, then your LVR will be different. If your deposit is $150,000, then your LVR will be 70%. If your deposit was $50,000 then your LVR will be 90%.

I’m ready to buy. Does borrowing above or below 80% LVR matter?

Now that we’ve covered what LVR is, let’s dig a little further into the detail. You’ll find 80% is a bit of a magic number when it comes to LVR. Depending on whether your loan to value ratio is above or below this, you’ll find yourself facing different borrowing conditions and different risks.

I’m planning to borrow up to 80% LVR. What should I know?

Borrowing up to 80% LVR gets you better rates because there’s less risk for the lender. They aren’t lending you the full (or nearly full) amount of the value of the home – you’re putting in 20% or more of the value of the home upfront with your deposit. And a smaller loan to value ratio makes the lender feel a bit more comfortable that they’ll be likely to get their money back should something go wrong.

The process is also usually a little bit easier at up to 80% LVR. The lender valuation will generally be a quick and simple desktop valuation. Instead of sending someone to view the actual home to assess the value (which can take time), an assessor will generally use a computer-based system to estimate the value. Easy.

What happens if the valuation comes back less than I expected?

If you’re planning on borrowing up to 80% LVR, you’ve got yourself a little buffer should there be an issue with the valuation. If the lender doesn’t agree with the price you are committed to paying (that is, values the home at less than the purchase price), you could still borrow more to cover the difference.

In our scenario above with a $500,000 purchase price, if the lender’s valuer decides the home is only worth $450k, then for 80% LVR they will likely only lend you $360,000. So this means you’ll either have to increase your deposit to $140k (instead of $100,000) to cover the difference. Or you could consider borrowing at 85% LVR. At 85% LVR the lender will lend you $382,500, which brings you closer to your original deposit amount. Of course, the lender will take other serviceability factors into account, so you’ll need to double-check this with them.

At over 80% LVR, this will usually mean the interest rate goes up and there will be LMI (Lenders Mortgage Insurance) applied, but at least you know you can settle and not be at risk of losing your deposit.

I’m planning to borrow over 80% LVR. What do I need to know?

Borrowing over 80% of a home’s value means LMI will start to kick in. LMI stands for Lenders Mortgage Insurance and it’s an insurance cost you need to pay because your loan is a greater risk to the lender (the loan amount is closer to the valuation – leaving them with not much wiggle room if something goes wrong). It comes in the form of a one-off insurance premium, which a lender will pass on to the borrower, to protect the lender against any losses it will face if you are unable to repay your home loan. The cost gets added to your total loan amount, and doesn’t need to be paid out of your deposit. But it does add to the overall cost of your loan.

Above 80% LVR you will often find that available interest rates will go up. Meaning that your borrowed money will cost you more in repayments.

And if you’re buying pre-auction or at auction with a planned higher-than-80%, be aware of the risks associated with valuations from lenders that may affect your ability to actually borrow. With no cooling off period and no option to increase your LVR, you might find yourself in a tricky situation if the lender values the home at less than the purchase price.

What are my options if I don’t want to pay LMI?

If you don’t want to pay LMI, you will need to look at other ways to increase your deposit, or ask a parent or family member to become a ‘Guarantor’ on your loan.  They become legally responsible for repaying your loan (as well as fees, charges and interest), in the event that you can’t.

Ready to buy but still have some questions? Let’s chat about which home loan is right for you.

Enquire Now