The Loan-to-Value Ratio (LVR) of your loan is the percentage of the property value that you’re borrowing.

Lenders use the LVR to assess your home loan application, as it indicates the likelihood that they will lose money if you can’t repay your loan.

An LVR of 100% is a very high risk, whereas an LVR of 80% or less is considered safe by most lenders. The majority of lenders will require you to pay Lenders Mortgage Insurance (LMI) if you borrow over 80% LVR.

Looking for ways to borrow at a high LVR?

Check out 5 Ways To Borrow At A High LVR to do just that!

Example of how to calculate LVR

If you borrow \$900,000 against a property valued at \$1,000,000, then what would your LVR be?

Loan amount: \$900,000

Property value: \$1,000,000

LVR calculation: 900,000 / 1,000,000 = 90% LVR

This would be considered high-risk LVR by the lender, so they would require LMI for your loan.

Example of LVR calculation with a low valuation

If you buy a property for \$1,100,000; however, the lender values it at \$1,000,000 and you want to borrow \$800,000, then what is the LVR?

Loan amount: \$800,000

Property value: \$1,000,000 (The lower of the purchase price or bank valuation)

LVR calculation: 800,000 / 1,000,000 = 80% LVR

This would be considered low-risk LVR by the lender, so they would not require LMI for your loan.

However, if you have a cooling-off period, you may want to withdraw from the sale or renegotiate the purchase price. Please be aware that the lender is not legally required to tell you that the valuation has come in low.

Example of LVR calculation for an off-the-plan purchase

Sometimes the value of an off-the-plan property can increase between the time when you sign the contract and when the settlement occurs. If over 12 months have passed, then some lenders will ignore the purchase price and rely on the valuation.

However, they can also consider the construction price if it is lower, depending on the lender’s policy.

If you buy a property for \$1,000,000; however, the lender values it at \$1,200,000 and you want to borrow \$900,000, then what is the LVR?

Loan amount: \$900,000

Property value: \$1,200,000 (purchase price is ignored)

LVR calculation: 900,000 / 1,200,000 = 75% LVR

This would be considered low-risk LVR by the lender, so they would not require Lenders Mortgage Insurance (LMI) for your loan.

In this example, if you wanted to you could increase your loan size and put in less of a deposit.

Example of LVR calculation for purchase from your family

What if you are buying a property from your family for less than the market value?

This is a common way for parents to help their adult children get into the property market. Some lenders still require you to have a deposit and others do not.

In our industry, this is known as a ‘favourable sale’. The other common methods parents help are with a guarantor loan or a gifted deposit.

If you buy a property for \$500,000; however, the lender values it at \$600,000 and you want to borrow 100% of the purchase price, then what is the LVR?

Loan amount: \$500,000

Property value: \$600,000 (purchase price is ignored)

LVR calculation: 500,000 / 600,000 = 83.33% LVR

This would be considered medium-risk LVR by the lender, so they would require LMI for your loan.

In this situation, you are close to an 80% LVR so there are some options that may get you a better deal. This is where a good mortgage broker can help.

You could try to get a bank valuation from another lender, reduce your loan to \$480,000 so you are at 80% LVR and avoid LMI, get an 85% no LMI home loan or just pay the LMI premium.

Example of LVR calculation for a construction loan

What if you want to buy land for \$500,000 and then build a house for \$500,000?

Let’s say that the bank completes a ‘Tentative on Completion valuation’ and values your property at \$1,000,000 when it is complete. What is your LVR if you borrow \$450,000 for the land and \$450,000 to build?

Land purchase LVR calculation

Loan amount: \$450,000

Property value: \$500,000

LVR calculation: 450,000 / 500,000 = 90% LVR

Construction LVR calculation

Loan amount: \$900,000 (this includes the land loan)

Property value: \$1,000,000 (the value when complete)

LVR calculation: 900,000 / 1,000,000 = 90% LVR

This would be considered high-risk LVR by the lender, so they would require LMI for your loan.

Please be aware that for a construction loan, the lender will consider the property value to be lower than the total cost of the project (land value plus cost of construction) or the Tentative on Completion valuation.

If you are overcapitalising or are paying your builder too much, you may get a low bank valuation.

Example of LVR calculation with capitalised LMI

If your loan is over 80% LVR, then the lender will likely require you to pay an LMI premium. In many cases, you can add this onto your loan in what is known as LMI capitalisation.

If you borrow \$900,000 against a property valued at \$1,000,000 and you add the LMI premium to your loan, then what would your LVR be? Let’s assume an LMI premium of 3% of the loan amount.

Base loan amount: \$900,000

Final loan amount: \$927,000 (includes an LMI premium of \$27,000)

Property value: \$1,000,000

Base LVR calculation: 900,000 / 1,000,000 = 90% LVR

Final LVR calculation: 927,000 / 1,000,000 = 92.70% LVR

Some lenders have limits on the capitalisation of an LMI premium. For example, most lenders don’t allow you to add LMI onto the loan if you are borrowing 95% LVR.

How does my LVR affect my loan?

The policy used by the lender will change depending on the LVR of your loan.

If you’re borrowing 80% LVR or less then the lender may make exceptions to their normal lending policy. This is considered to be a low LVR home loan.

However, if you’re borrowing above 80% LVR, you’ll find that lenders are less willing to make exceptions, ask for more documents and assess your loan in a conservative way. This is considered to be a high LVR mortgage.

You can read the pages below for more information on applying for a high LVR home loan:

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