Loan-to-value ratio (LVR) is the size of your mortgage expressed as a percentage of the property's value. It tells lenders (and you) how much of the property is funded by borrowed money versus your own equity or deposit.
If you buy a property worth $500,000 with a $400,000 mortgage and a $100,000 deposit, your LVR is 80%.
How LVR Is Calculated
The formula is simple:
LVR = (loan amount / property value) x 100
Lenders use the lower of the purchase price or the bank's valuation. If you pay $500,000 for a property but the bank values it at $480,000, the LVR is calculated against $480,000.
Why LVR Matters
LVR affects several things:
- Interest rates: some lenders offer lower rates for lower LVRs because the loan is less risky
- Lenders Mortgage Insurance (LMI): if your LVR is above 80%, most lenders require you to pay LMI, which can add thousands of dollars to your borrowing costs
- Borrowing capacity: a lower LVR generally means the lender views you as a lower-risk borrower
- Loan approval: some loan products or features are only available below certain LVR thresholds
Common LVR Thresholds
- 80% or below: no LMI required, best rates available
- 80% to 90%: LMI required, higher rates may apply
- 90% to 95%: LMI required, limited lender options, higher rates
- Above 95%: very few lenders will approve, and costs are significantly higher
How LVR Changes Over Time
As you pay down the mortgage principal and the property value increases, your LVR decreases. This can open up refinancing opportunities, access to better rates, and the ability to borrow against the equity you have built. However, if you have an interest-only loan, your principal is not being reduced, so your LVR only changes with property value movements.
Why It Matters for Landlords
Your LVR at purchase determines your upfront costs (deposit and LMI) and your ongoing interest rate. Over time, a decreasing LVR means growing equity that you can potentially use to fund your next investment. If your LVR rises above 100% due to falling values, you are in negative equity. Keeping track of your current LVR across all properties helps you understand your overall financial position.
propkt tracks property values and loan details so you can monitor your LVR and equity position across your portfolio. Use the savings calculator to model different deposit and borrowing scenarios.