What is loan to value ratio (LVR)?
LVR is the percentage of a property's value that a lender will loan, expressed as a ratio of the loan amount to the total purchase price or valuation.
Your loan to value ratio (LVR) measures how much a lender is willing to advance as a percentage of the property's value. If you buy a house for $500,000 with a $400,000 loan, your LVR is 80 percent. The remaining 20 percent is your deposit or equity.
LVR directly affects both your interest rate and whether you'll pay lenders mortgage insurance (LMI). Lenders typically offer their best rates for LVRs of 80 percent or lower, as your larger deposit reduces their risk. Borrowing at 90 percent LVR or higher usually means paying LMI on top of your regular loan, which protects the lender if you default. This insurance gets added to your loan amount, increasing total borrowing costs.
In practice, if you're buying that $500,000 property with only a $350,000 deposit (70 percent LVR), you'll get more competitive rates than someone borrowing at 95 percent LVR with a smaller deposit. The difference in rates and LMI premiums can add tens of thousands to your loan over time.
Understanding your LVR helps you work out genuine borrowing capacity and compare loan products fairly. A mortgage broker in Perth can explain how your specific LVR affects available interest rate tiers and total loan costs for your situation.