Loan to value ratio: how LVR shapes a home loan

The loan to value ratio, universally abbreviated to LVR, is the loan amount expressed as a percentage of the value of the property securing it. It is the single number that does the most work in Australian mortgage lending. It determines whether lenders mortgage insurance is payable, it frequently determines the interest rate offered, and it governs which lender policies a borrower can access.

The formula is simple. The complications lie in what counts as the value, which costs are inside and outside the ratio, and how quickly the ratio moves after settlement.

How LVR is calculated

LVR is the loan divided by the value of the security property, expressed as a percentage. A $560,000 loan against a $700,000 property is an LVR of 80 per cent.

The critical detail is that value means the lower of the purchase price and the lender's valuation. A lender will not lend against a price it does not accept. Where a valuation comes in below the contract price, the ratio is calculated on the valuation, and the shortfall must be funded in cash.

The effect can be significant. Assume a buyer has $140,000 available on a $700,000 purchase, expecting an LVR of exactly 80 per cent and no mortgage insurance. If the lender values the property at $670,000, the $560,000 loan represents 83.6 per cent of the valuation. To remain at 80 per cent, the lender will advance only $536,000, and the buyer must find a further $24,000 or accept mortgage insurance. The guide to property valuations for home loans explains the types of valuation used and what can be done when one is low.

Two further points are commonly misunderstood. Purchase costs such as transfer duty and conveyancing sit outside the ratio, because they do not add to the value of the property, which is why they must be funded in cash. Lenders mortgage insurance, by contrast, is usually allowed to be capitalised above the maximum ratio, so a loan at 95 per cent may in fact settle at closer to 98 per cent once the premium is added.

Deposit required at each LVR

The relationship between deposit and ratio is arithmetic, but seeing it as a table makes the steps visible.

LVR	Loan on a $700,000 purchase	Deposit required	Usual treatment
95 per cent	$665,000	$35,000	Mortgage insurance payable, higher rates, stricter policy
90 per cent	$630,000	$70,000	Mortgage insurance payable, wider lender choice
85 per cent	$595,000	$105,000	Mortgage insurance payable but materially cheaper
80 per cent	$560,000	$140,000	No mortgage insurance, standard pricing
70 per cent	$490,000	$210,000	Access to some lenders' lowest rates
60 per cent	$420,000	$280,000	Best pricing tier at most lenders

The deposit figures exclude transfer duty and other purchase costs, which are additional, as set out in the guide to the upfront costs of buying a home. The deposit calculator models the full position.

Why 80 per cent is the dividing line

The 80 per cent threshold is a matter of capital treatment and credit policy rather than law. Lending above it attracts a higher capital charge for an authorised deposit-taking institution, so lenders either insure the risk or price for it. Above 80 per cent, mortgage insurance is generally required, and the premium rises sharply as the ratio increases: on the indicative table behind this site's LMI calculator, a $700,000 purchase attracts a premium of roughly $4,200 at 85 per cent, $11,300 at 90 per cent and $24,600 at 95 per cent.

The threshold also changes what a lender will consider. Above 80 per cent, lenders commonly tighten other criteria: minimum genuine savings requirements, restrictions on acceptable security such as small apartments or rural properties, limits on acceptable income types, and closer scrutiny of credit history. The guide to lenders mortgage insurance covers the premium itself.

Pricing tiers below 80 per cent

Many borrowers assume that once mortgage insurance is avoided, LVR stops mattering. It does not. Most lenders now publish tiered pricing, with progressively lower rates at 80, 70 and 60 per cent, and some add a tier at 50 per cent.

The differences are not trivial. A reduction of even 0.15 percentage points on a $500,000 loan is worth roughly $750 of interest in the first year, and considerably more over the life of the loan. For a borrower close to a threshold, a modest lump sum that crosses it can be worth far more than the same sum applied to a loan in the middle of a band.

This matters most at refinance. A borrower who bought at 90 per cent several years ago may now sit below 70 per cent through repayments and growth, and be entitled to pricing they are not receiving from their existing lender. Existing customers are not usually repriced automatically, a point examined in the guide to the cost of remaining with an existing lender.

How quickly LVR falls after settlement

Two forces reduce the ratio: principal repayments and any increase in value. Their relative contribution is instructive.

The following is illustrative only. Assume a $700,000 purchase with a $665,000 loan, an LVR of 95 per cent, at a constant assumed 6.00 per cent over 30 years, with a repayment of about $3,987 a month and no extra repayments.

Year	Loan balance	LVR with no growth	LVR with 3 per cent annual growth
1	$656,834	93.8 per cent	91.1 per cent
2	$648,164	92.6 per cent	87.3 per cent
3	$638,959	91.3 per cent	83.5 per cent
4	$629,187	89.9 per cent	79.9 per cent
5	$618,811	88.4 per cent	76.3 per cent
7	$596,102	85.2 per cent	69.2 per cent

Two conclusions follow. Without growth, repayments alone take roughly seven years to move a 95 per cent loan to 85 per cent, because early repayments are mostly interest. With modest growth assumed at 3 per cent a year, the same loan reaches 80 per cent in about four years. Growth does most of the work in the early years, which is precisely why it cannot be relied upon: it is the component outside the borrower's control and it can be negative.

Extra repayments change the first column materially, and are the only lever a borrower controls directly. The mortgage payoff calculator shows the effect on the balance over time.

LVR limits by property and loan type

Maximum ratios are not uniform. Lender policy commonly applies lower caps where the security or the purpose is considered higher risk. The following are common patterns rather than universal rules, and differ between lenders.

• Standard owner-occupied house or townhouse. Generally up to 95 per cent with mortgage insurance.
• Investment property. Often capped slightly lower, and priced above owner-occupier rates.
• Small apartments. Many lenders reduce the maximum ratio for apartments below a defined internal floor area, commonly around 40 or 50 square metres, and some decline them entirely.
• High density or high exposure buildings. Lenders maintain postcode and building lists where they limit exposure, which can reduce the maximum ratio without warning.
• Vacant land. Generally a lower maximum than an established dwelling.
• Construction. Assessed against the on-completion value, as set out in the guide to construction loans and progress payments.
• Rural and lifestyle property. Maximum ratios fall as land size increases, and some lenders apply a cap on the land area they will value.
• Company title, serviced apartments and student accommodation. Frequently restricted or excluded.

Because these caps are policy rather than regulation, they differ between institutions, and a property declined by one lender may be acceptable to another. The guide to Australian lenders provides background on how policies differ.

LVR when more than one property is involved

Where a borrower owns several properties, the way security is arranged changes the ratio that applies.

Under cross-collateralisation, two or more properties secure the same loan or set of loans, and the lender assesses the combined ratio across all securities. This can allow a higher total borrowing, but it ties the properties together: selling one generally requires the lender's consent and a reassessment, and the proceeds may be directed to reduce debt rather than released.

Under a standalone structure, each property secures its own loan, and equity is released by a separate loan secured against the property that holds it. This usually preserves more flexibility, at the cost of slightly more administration. The guide to using home equity while managing leverage examines the trade-off, and the home equity calculator estimates usable equity at a given ratio.

LVR and the wider lending limits

LVR is only one of several constraints. A borrower may satisfy the ratio comfortably and still be declined on serviceability, because the lender must assess repayments at an interest rate at least three percentage points above the product rate. Since 1 February 2026 a further constraint applies: the Australian Prudential Regulation Authority limits authorised deposit-taking institutions to writing no more than 20 per cent of new mortgage lending at a debt to income ratio of six times or more.

A large deposit reduces LVR but does not by itself resolve a serviceability or debt to income constraint, because both are measured against income rather than against the property. The guides to how much you can borrow and debt to income ratios cover those limits.

Measuring LVR on a refinance

On a purchase the price provides a ceiling on value. On a refinance there is no price, so the ratio rests entirely on the new lender's valuation, and the borrower has no contract to point to.

This produces a familiar difficulty. A borrower who believes their property is worth $900,000 and owes $600,000 expects a ratio of 67 per cent and the pricing that goes with it. If the incoming lender values the property at $820,000, the ratio is 73 per cent, which may fall into a different pricing tier or, for a borrower closer to the margin, above 80 per cent and into mortgage insurance on a loan that previously had none.

Several practical responses exist. A borrower can ask a broker to obtain upfront valuations from more than one lender before an application is submitted, since valuations differ and an application is not required to request one at many lenders. A borrower can also supply evidence of recent comparable sales and of improvements made since purchase. Where the result is unsatisfactory, remaining with the existing lender and requesting a repricing is often the better outcome, because no new valuation is required to reprice an existing loan. The sequence is set out in the guide to how to refinance a home loan.

Using LVR to plan a purchase

Because the thresholds are known in advance, LVR can be planned rather than discovered. Three questions are worth answering before a property is chosen.

1. Which threshold is realistically reachable? If a household is $15,000 short of 80 per cent on its target price, the choice is between a few more months of saving, a slightly lower purchase price, or a mortgage insurance premium. All three are legitimate; the point is to choose deliberately.
2. What does the next threshold down save? Moving from 90 to 85 per cent on a $700,000 purchase reduces the indicative premium by roughly $7,200 for an additional $35,000 of deposit, which is a return of about one dollar in five on the additional savings.
3. What happens if the valuation is low? A buyer at exactly 80 per cent has no margin. Holding a contingency of two or three per cent of the price protects against a valuation shortfall without having to renegotiate or withdraw.

Common mistakes

• Calculating LVR on the purchase price when the valuation is lower. The lower figure governs.
• Forgetting that purchase costs sit outside the ratio. A deposit of exactly 20 per cent is not a 20 per cent deposit once duty is paid.
• Assuming LVR stops mattering below 80 per cent. Pricing tiers continue at 70 and 60 per cent.
• Relying on growth to reach 80 per cent by a particular date, for example to release a guarantor.
• Using an online estimate as a valuation. Automated estimates are not the figure a lender uses.
• Not asking for a repricing after the ratio falls. Lenders rarely offer it unprompted.

Figures in this article are illustrative and assume a constant interest rate. This is general information and not personal advice. Borrowers who would like their current ratio and the pricing it should attract reviewed may request a free assessment from an accredited broker.