Understanding Loan to Value Ratio (LVR)
Loan to Value Ratio is the single most important number your lender looks at when assessing your loan application. It expresses your loan amount as a percentage of the property value: LVR = (Loan Amount / Property Value) x 100.
An LVR of 80% means you are borrowing 80% of the property value and contributing 20% as a deposit. Lenders view lower LVR loans as less risky -- if property values fall, there is a larger equity buffer protecting their investment.
Why 80% LVR Is the Magic Number
At or below 80% LVR, you avoid Lenders Mortgage Insurance (LMI), qualify for better interest rates, and have more lender options. Every percentage point above 80% increases your borrowing cost. An investor borrowing $500,000 at 90% LVR might pay 0.2-0.5% higher interest than the same borrower at 80% LVR -- that is $1,000-$2,500 extra per year in interest alone.
LMI: The Cost of a Smaller Deposit
Lenders Mortgage Insurance protects the lender (not you) if you default. It is a one-off premium calculated based on your LVR, loan amount, and the insurer's risk assessment. LMI can range from $5,000 for an 85% LVR loan to $25,000+ for a 95% LVR loan. While expensive, LMI allows you to enter the market sooner -- which can be worthwhile in a rising market.
Using Equity to Reduce LVR
If you already own property, you may be able to use existing equity as a deposit for your next purchase. For example, if your home is worth $800,000 and you owe $400,000, you have $400,000 in equity. Most lenders will let you access up to 80% of the value minus the existing loan: ($800,000 x 0.80) - $400,000 = $240,000 available as a deposit for an investment property.
Calculate your stamp duty to understand the total cash required beyond your deposit, and use the Cash Flow Calculator to stress-test your repayments at different LVR levels.