How to Calculate LVR: A Simple Guide for Australian Home Buyers

The amount you are borrowing expressed as a proportion of the property’s worth is known as the Loan to worth Ratio, or LVR. It’s important to calculate LVR as it can have significant implications for Australian home buyers. Generally, loans with an LVR over 80% are considered higher risk by lenders, potentially resulting in higher interest rates and additional expenses. On the other hand, keeping your LVR below 80% can help you borrow more at lower rates with lower repayments.

Understanding how to calculate your LVR correctly is, therefore, essential before applying for a home loan. With this information, you can obtain better loan conditions and steer clear of needless expenses like Lender’s Mortgage Insurance (LMI). Additionally, it gives you the opportunity to take strategic steps to improve your position if your initial calculations show an unfavourable ratio.

This guide will walk you through everything you need to know about LVR calculation, from basic formulas to practical strategies for lowering your ratio and maximising your borrowing power.

What is LVR and Why It Matters

The Loan to Value Ratio (LVR) sits at the core of home loan applications in Australia, functioning as a critical metric that shapes your mortgage journey. Understanding this concept thoroughly can significantly impact your financial outcomes when purchasing property.

Understanding LVR

LVR represents the amount you’re borrowing as a percentage of your property’s value. In essence, it’s a simple mathematical ratio that provides lenders with crucial information about the loan’s risk profile. To calculate your LVR, divide your loan amount by the property’s value (as determined by the lender), then multiply by 100.

It’s worth noting that your LVR depends on the lender’s valuation of the property, not necessarily the purchase price. Consequently, if these figures differ, lenders typically use the lower value when determining your LVR.

Why lenders care about your LVR?

From a lender’s perspective, LVR serves as a fundamental risk assessment tool. Higher LVRs indicate greater lending risk since you’re borrowing more relative to the property’s value. In contrast, a lower LVR demonstrates you have more equity in the property from the start, making you a more attractive borrower.

Most lenders in Australia consider loans with an LVR over 80% to be particularly high risk. Because this essentially determines if you will have to pay Lenders Mortgage Insurance (LMI), which safeguards the lender rather than you in the event of a payment default.

LVR and Your Borrowing Power

Your LVR directly influences several aspects of your borrowing capacity and loan terms:

1. Loan approval chances: In general, the lower your LVR, the more likely you are to be approved for a loan, as it indicates you have more equity in the property.
2. Interest rates: Many lenders offer more favourable interest rates when you have a lower LVR. For example, a borrower with a 70% LVR might access better rates than someone with an 80% LVR.
3. LMI requirements: Typically, in Australia, an LVR exceeding 80% triggers LMI payments, which can add thousands to your loan. In certain circumstances, LMI may apply even to LVRs below 80%.
4. Maximum borrowing limits: While some lenders may loan up to 95% of a property’s value (inclusive of LMI), most prefer to lend up to 80% LVR, meaning you’ll need a 20% deposit.
5. Loan scrutiny: Applications with high LVRs face more rigorous assessment to ensure borrowers can manage repayments.

Furthermore, lenders may impose stricter lending policies for properties in certain postcodes or suburbs they consider higher risk. This could mean you’ll need a larger deposit (lower LVR) to qualify for a loan in these areas.

Essentially, maintaining a lower LVR provides greater flexibility, potentially saving you significant money through better interest rates and avoiding LMI premiums altogether.

How to Calculate Your LVR

LVR calculation is quite simple, with the right formula and understanding, Australian home buyers can quickly determine their LVR position and make informed decisions about their home loan applications.

Step-by-step LVR Calculation Formula

The calculation process for LVR involves a straightforward formula that anyone can master. Initially, you’ll need to gather two crucial pieces of information:

1. Determine your loan amount – This is the amount you plan to borrow from your lender
2. Identify the property’s value – This is the lender’s valuation of the property (not necessarily the purchase price)

Once you have these figures, the LVR calculation follows a simple three-step process:

1. Divide your loan amount by the property’s lender-assessed value
2. Multiply the result by 100 to get a percentage
3. The final figure represents your LVR percentage

As a mathematical formula, this appears as: LVR = (Loan Amount ÷ Property Value) × 100

Example Calculation for Clarity

To illustrate this concept, let’s examine several practical examples:

Example 1: Suppose you wish to purchase a property valued at AUD 764,495.12 and have saved a deposit of AUD 152,899.02. This means you need to borrow AUD 611,596.09.

Your LVR calculation would be: AUD 611,596.09 ÷ AUD 764,495.12 = 0.8 0.8 × 100 = 80% Your LVR is 80%

Example 2: Kerry and Srikanth are looking to buy a property with a bank valuation of AUD 1,528,990.23. With a deposit of AUD 152,899.02, they need to borrow AUD 1,376,091.21.

Their LVR calculation: AUD 1,376,091.21 ÷ AUD 1,528,990.23 = 0.9 0.9 × 100 = 90% Their LVR is 90%

Example 3: If you’re borrowing AUD 733,915.31 for a property valued at AUD 917,394.14, your calculation would be: AUD 733,915.31 ÷ AUD 917,394.14 = 0.8 0.8 × 100 = 80% Your LVR is 80%

For those who prefer technological assistance, numerous online LVR calculators are available. These tools require only the input of your loan amount and property value to calculate your LVR instantly.

What’s included and excluded in the loan amount?

Understanding what goes into your loan amount is crucial for accurate LVR calculations. Notably, several components influence this figure:

Included in LVR calculations:

• The principal sum borrowed to buy the property
• Any capitalised Lenders Mortgage Insurance (for loans with LVR above 80%)

Excluded from LVR calculations:

• Upfront costs such as conveyancing fees
• Stamp duty payments
• Legal fees
• Other settlement costs

It’s worth noting that the LVR calculation differs slightly when refinancing your home. During refinancing, lenders assess the current market value of your property rather than your original purchase price. Throughout this process, banks evaluate numerous factors when determining your property’s value, including:

• Property size and house dimensions
• Any improvements made to the property
• Location and neighbourhood factors
• Building condition and age
• Local council regulations
• Upcoming developments in the area

Always remember that lenders typically use their own property valuation rather than the market price or purchase price when calculating LVR. Should these figures differ, lenders commonly use the lower value to determine your LVR position.

Valuation Methods That Affect LVR

Understanding property valuations is crucial when calculating your LVR, as lenders rely heavily on these figures to determine how much they’re willing to lend you. The valuation method used can dramatically alter your LVR and subsequently affect your borrowing options.

Bank Valuation vs Market Valuation

Two primary types of valuations come into play when purchasing property: bank valuations and market valuations. These often differ substantially, which directly impacts your LVR calculation.

A bank valuation is conducted by professional valuers hired by the lender, focusing on the property’s quick-sale value. This assessment tends to be more conservative than market values, primarily because it aims to protect the lender’s interests. Bank valuers carefully examine the property’s location, condition, structural integrity, zoning areas, proximity to transport, and schooling.

In contrast, market valuations (or estimates) typically produce higher figures. These estimates reflect what buyers are likely to pay in the current market based on recent comparable sales. Market valuations account for emotional factors like buyer competition and assume sellers will wait to achieve the best possible price.

Bank valuations may come in 10-20% below market valuations. This difference exists because banks must factor in potential selling costs—including agent commissions, advertising, and legal fees—should they need to repossess and sell the property.

Why Lenders Use the Lower Value

Lenders invariably use the lower of the two valuations when calculating your LVR. This conservative approach minimises their risk exposure if you default on loan repayments.

Should the bank valuation come in below your purchase price, this can create complications. For instance, if you’re buying an apartment for AUD 764,495.12 with a 10% deposit (AUD 76,449.51), but the lender values it at only AUD 688,045.60, you’ll need to contribute an extra AUD 76,449.51 to cover this shortfall.

How Postcode Restrictions Impact LVR

Beyond individual property assessments, lenders often impose location-based LVR restrictions. These “postcode restrictions” limit the maximum LVR for properties in certain areas deemed higher risk.

Typically, lenders cap LVRs more strictly in remote locations, city CBDs, and areas with high-density apartment buildings, as these can experience sharper price fluctuations. Borrowers purchasing in these restricted postcodes may need larger deposits—often 20% or more—regardless of the property’s individual valuation.

As a general guideline, lenders might offer up to 90% LVR (with LMI) in towns with populations exceeding 10,000. Nevertheless, areas undergoing gentrification may see fewer restrictions over time as demand rises and prices stabilise.

What Happens When Your LVR Is Over 80%

The 80% LVR threshold represents a critical tipping point in Australian mortgage lending. Crossing this line triggers several significant consequences that affect both your upfront costs and ongoing loan expenses.

Lenders Mortgage Insurance (LMI)

LMI becomes mandatory whenever your LVR exceeds 80%. This one-off, non-refundable, and non-transferrable insurance premium protects lenders—not borrowers—if you default on your loan. Although you pay the premium, LMI solely safeguards the lender against losses when your property sells for less than the outstanding loan amount.

Most Australian lenders will provide loans with an LVR up to 95% (inclusive of LMI), though this varies based on individual circumstances. LMI costs can be substantial—for instance, a 5% deposit on a AUD 1,070,293.16 property could trigger an LMI premium exceeding AUD 55,312.75. LMI can be paid upfront or capitalised into your loan total, wherein you’ll pay interest on this premium throughout the loan term.

Higher Interest Rates and Repayments

Beyond LMI, high-LVR borrowers face several additional financial impacts:

• The lender typically charges higher interest rates to offset their increased lending risk
• These elevated rates lead to higher monthly repayments
• Adding capitalised LMI to your loan further increases your repayment amounts

For example, with a 95% LVR loan on a AUD 1,070,293.16 property at 6% p.a., monthly repayments could reach approximately AUD 6,115.96 compared to around AUD 4,434.07 for an 80% LVR loan—a difference exceeding AUD 1,681.89 monthly.

Loan Application Scrutiny at High LVR

Lenders implement stricter assessment criteria for high-LVR applications to mitigate their increased risk. This heightened scrutiny often includes:

More thorough examination of your financial situation , Detailed income verification and credit history assessment , Comprehensive analysis of your overall debt levels , Additional documentation requirements , Less flexibility in lending terms

Borrowers with high initial LVRs statistically demonstrate lower liquidity buffers, lower incomes and lower total wealth than other borrowers. Indeed, studies show that owner-occupiers with initial LVRs above 90% report mortgage repayment difficulties more frequently than those with lower LVRs.

Related Article: Mortgage Calculator UK: Estimate Your Monthly Payments with Ease

Ways to Lower Your LVR Before Applying

Before you qualify for your home loan, you can get a favourable LVR, which will save you hundreds of dollars in interest and fees. Here are effective strategies to consider for improving your position.

Save a Larger Deposit

Increasing your deposit is the easiest way to lower your LVR. The more extensive your deposit, the lower your LVR will be—potentially saving you thousands through better interest rates and avoiding LMI. Even small improvements make a difference; moving your LVR from 85% to 80% could eliminate LMI. However, consider whether waiting to save might be counterproductive if property prices are rising at a similar rate to your savings growth.

Buy a Less Expensive Property

Opting for a more affordable property immediately reduces your LVR without requiring additional savings. This might mean looking at different suburbs, property types, or settling for fewer features. A more modest first home can still provide entry to the property market and allow you to build equity before upgrading later.

Negotiate a New Property Valuation

If your property valuation comes in too low, consider challenging it. Collect evidence of comparable sales from the past 3-6 months, obtain information from local real estate agents, and submit comprehensive documentation to support your case. Despite only about 5% of challenges succeeding, attempting this could potentially improve your LVR position.

Conclusion – Calculate LVR

Understanding your LVR thoroughly stands as a critical factor in securing a favourable home loan in Australia. This simple ratio significantly influences your mortgage costs, interest rates, and overall borrowing capacity. Throughout this guide, we’ve examined the importance of keeping your LVR below 80% to avoid Lenders Mortgage Insurance and qualify for better interest rates.

Ultimately, your LVR calculation serves as more than just a mathematical exercise – it fundamentally shapes your borrowing power and long-term financial position. Armed with this knowledge, Australian home buyers can make strategic decisions to strengthen their position, potentially saving thousands in unnecessary costs while securing more favourable loan terms. Taking time to calculate and improve your LVR before submitting your application will surely pay dividends throughout your entire home ownership journey.