How LVR is calculated
LVR is calculated by dividing the loan amount by the property's value (or purchase price, whichever the lender uses as the basis) and expressing the result as a percentage. For example, borrowing a large portion of a property's value against a small deposit results in a high LVR, while borrowing a smaller portion against a larger deposit results in a low LVR. Lenders typically use the lower of the purchase price or an independent valuation when calculating LVR, which means the figure used for approval purposes might differ slightly from the price agreed with the seller if the valuation comes in below the contract price. LVR is recalculated at various points, including refinancing, and can also change over time as the loan balance reduces or the property's value shifts, which is relevant for anyone reviewing their loan or considering removing lenders mortgage insurance later on. Keeping a record of any valuations obtained can also be useful evidence if you later dispute a lender's assessment or seek a review.
Why LVR matters to lenders
LVR is one of the key ways lenders assess risk on a home loan. A higher LVR means the lender is financing a larger share of the property's value, leaving a smaller buffer if the property needs to be sold and prices have fallen. Because of this, lenders typically apply stricter assessment criteria, higher interest rates, or additional insurance requirements to loans with a higher LVR. Conversely, a lower LVR, achieved through a larger deposit or existing equity, is generally viewed as lower risk and can support access to more competitive rates and loan features. This is why understanding your likely LVR before applying can be useful, since it shapes not just whether a loan is approved but the terms on which it's offered, including the interest rate tier a lender applies to the loan. Taking time to understand this before applying can help set realistic expectations. It's a detail worth clarifying directly with a lender or broker if anything is unclear.
LVR thresholds and lenders mortgage insurance
Many lenders apply lenders mortgage insurance (LMI) when the LVR exceeds a certain threshold, commonly referenced around the 80% mark, though the exact threshold and premium structure varies between lenders and loan products. LMI protects the lender, not the borrower, against loss if the borrower defaults and the sale proceeds don't cover the outstanding loan. The premium is typically a one-off cost, often able to be added to the loan amount, and it generally increases as the LVR rises further above the threshold. Some borrowers avoid LMI entirely by saving a larger deposit, using a guarantor arrangement, or accessing a scheme designed to support certain buyers with a reduced deposit requirement, though eligibility criteria and conditions typically apply to these alternatives. It's a detail worth clarifying directly with a lender or broker if anything is unclear. Small differences here can add up meaningfully over the full term of a loan.
How LVR affects loan features and pricing
Beyond LMI, LVR can influence which loan products and features are available to a borrower. Some lenders restrict access to certain rates, offset accounts, or interest-only options above particular LVR thresholds, reflecting the additional risk associated with higher LVR lending. As a loan is repaid and property values potentially rise, the effective LVR typically decreases over time, which can open up opportunities such as refinancing to a better rate, requesting removal of LMI in some cases, or accessing equity for other purposes. It's worth periodically reviewing your LVR, particularly after a period of price growth or once a meaningful amount of principal has been repaid, since your circumstances at the time of a fresh assessment could differ considerably from those at the original settlement. Small differences here can add up meaningfully over the full term of a loan. Borrowers who ask about this upfront are typically better placed to avoid surprises later.
Reducing your LVR before or after settlement
Reducing LVR before applying typically involves saving a larger deposit, using existing savings or equity in another property, or accepting a guarantor arrangement where a family member's property supports part of the loan. After settlement, LVR can reduce naturally as the loan balance is paid down through regular repayments, particularly on principal and interest loans, or through additional voluntary repayments. Property value growth can also reduce LVR without any change to the loan balance, though this relies on market movements rather than borrower action and typically requires a fresh valuation to confirm. Borrowers considering refinancing or removing LMI should check what evidence a lender requires to reassess LVR, since an updated valuation is typically needed rather than relying on general market estimates alone. Borrowers who ask about this upfront are typically better placed to avoid surprises later. This is one of the finer details that a good broker can help talk through.
Key points
- LVR is the loan amount divided by the property's value, shown as a percentage
- Lenders typically use the lower of the valuation or purchase price to calculate LVR
- LMI commonly applies above an LVR threshold, often referenced around 80%
- LMI protects the lender, not the borrower, in the event of default
- LVR typically falls over time as the loan is repaid or property values rise
Frequently asked questions
What LVR avoids lenders mortgage insurance?
This varies by lender, but LMI is commonly triggered once LVR exceeds a threshold often referenced around 80%. Staying below that threshold with a larger deposit or existing equity may avoid the premium, subject to the specific lender's policy.
Does LVR change after settlement?
Yes, typically. As you repay principal, the loan balance falls relative to the property's value, reducing LVR over time. Property value growth can also reduce LVR, though a fresh valuation is usually needed to confirm this for lender purposes.
Is LVR based on the purchase price or the valuation?
Lenders typically use the lower of the two. If an independent valuation comes in below the agreed purchase price, the lender will generally calculate LVR using the valuation figure, which can affect deposit requirements and LMI.