How to calculate LVR

Understanding your Loan-to-Value Ratio (LVR) is crucial when applying for a mortgage or any loan secured against property. The LVR is a measure of the risk associated with lending to you, and it plays a significant role in determining the terms and conditions of your loan.

What does loan-to-value ratio (LVR) mean?

LVR is the ratio of the loan amount to the value of the property being used as security for the loan. It is expressed as a percentage and helps lenders assess the risk of lending you money. A lower LVR indicates lower risk to the lender, while a higher LVR represents higher risk.

Why is LVR important?

1. Interest Rates: Lenders often offer more competitive interest rates for loans with lower LVRs.
2. Lender’s Mortgage Insurance (LMI): If your LVR is above 80%, you may be required to pay Lender’s Mortgage Insurance, which protects the lender if you default on the loan.
3. Loan Approval: A lower LVR can improve your chances of loan approval, as it suggests to the lender that you have a substantial equity stake in the property.

How to calculate loan-to-value ratio

Calculating your LVR is straightforward. The formula is:

LVR = ( Loan Amount / Property Value ) x 100

Step-by-step calculation

1. Determine the Loan Amount: This is the total amount you plan to borrow or have borrowed.
2. Find the Property Value: Use the current market value of the property, which can be obtained through a property appraisal or market analysis.
3. Apply the Formula: Divide the loan amount by the property value and multiply by 100 to get the LVR as a percentage.

Example calculation

Let’s say you want to borrow $400,000 to purchase a property valued at $500,000.

1. Loan Amount: $400,000
2. Property Value: $500,000

LVR = ( 400,000 / 500,000 ) x 100 = 80%

In this example, the LVR is 80%, meaning the loan amount is 80% of the property’s value.

Practical considerations for LVR

1. Impact of Property Value Changes: The LVR can change if the property value increases or decreases. Regularly reassess your LVR to understand your equity position.
2. Equity and Refinancing: A lower LVR can increase your home equity, allowing you to refinance on better terms or access additional funds through a home equity loan.
3. Deposit Size: A larger deposit reduces the loan amount and thus lowers the LVR. Aim for a deposit of at least 20% of the property value to avoid LMI.

Illustrative Example of LVR Impact

Imagine you are purchasing a home valued at $600,000. You have saved a deposit of $150,000 and need to borrow $450,000.

1. Loan Amount: $450,000
2. Property Value: $600,000

LVR = ( 450,000 / 600,000 ) x 100 = 75%

With an LVR of 75%, you are in a stronger position when negotiating loan terms and are likely to avoid LMI.

Learn more

For further guidance on calculating and understanding LVR, visit the Australian Securities and Investments Commission’s MoneySmart website, which offers comprehensive resources on home loans and financial management.

By calculating your LVR accurately, you can make informed decisions about your borrowing capacity, improve your chances of securing favourable loan terms, and manage your financial risks effectively.