Loan to Value Ratio (LVR) is a percentage calculated by dividing the loan amount by the lender-assessed value of your property. Lenders consider an LVR of more than 80% as a higher risk. For lenders to accept higher-risk loans, you may need to account for additional out of pocket costs such as Lenders Mortgage Insurance.
How does LVR work
- Your lender values the property at $1 million
- You put down 20% deposit of $200,000, and planning to borrow the remaining $800,000
- Your LVR would then be calculated like this:
$800,000 ÷ $1,000,000 = 80%
The example above does not take into account any additional fees such as legal or stamp duty.
Why should you care about LVR and how do you calculate it?
Your LVR can determine the type of loan and interest rate you can be approved by your bank. LVR that are less than or equal to (≤)80% means banks may provide better discounted rates, and greater than (>)80% means your loan application will be considered high-risk.
By knowing this, you are now in a better position to evaluate your own financial situation.
Your lender-assessed value may be different to the purchase price. Here is a basic illustration of the difference you need to make up for if your lender-assessed value is different to the purchase price.
| Purchase price | $1 million | $1 million | $1 million |
| 20% deposit | $200k | $200k | $200k |
| Loan amount needed | $800k | $800k | $800k |
| Lender-assessed value | $900k | $950k | $1 million |
| Current LVR | 88.89% | 84.21% | 80% |
| Borrowing power at 80% LVR | $720k | $760k | $800k |
| Additional deposit funds for LVR to be 80% or below | $80k | $40k | $0 |
What happens if valuation is higher than the purchase price?
Lenders tend to use the lesser of the two for normal property purchases when determining your borrowing power.
However, sometimes lenders may have a separate criteria for off the plan apartments when it is more than 12 months or even several years when the price was agreed and when the settlement occurs.
When this happens lenders may opt to use the market value rather than the purchase price when assessing your loan to value ratio (LVR), lenders mortgage insurance (LMI) premium and final loan amount.
Can you negotiate LVR with a lender?
It’s possible to negotiate Loan to Value Ratio with a lender in some cases, particularly if you have a strong financial position and can provide additional security for the loan. However, this will depend on the lender’s policies and requirements, as well as your individual circumstances.
If you are looking to negotiate a lower LVR, you may need to provide a larger deposit or additional collateral to secure the loan. Alternatively, you could consider reducing the loan amount or looking for a property with a lower value. It’s important to note that negotiating a lower LVR may also impact the interest rate and fees associated with the loan.
When negotiating with a lender, it’s important to be prepared and have a clear understanding of your financial position and the risks and benefits associated with the loan. It can also be helpful to work with a mortgage broker or financial advisor who can provide guidance and support throughout the process.
