What is LVR and why does it affect your loan?

LVR stands for loan-to-value ratio. It's the single number lenders use to work out how risky your loan is — and it shows up everywhere in home loan conversations, from pre-approval to your final interest rate.

The formula is simple: LVR = loan amount ÷ property value × 100. Say you're buying a $500,000 property and you need to borrow $400,000. Your LVR is 400,000 ÷ 500,000 × 100, which comes out to 80%. The other 20% — your deposit plus any costs you've covered yourself — is your equity in the deal from day one.

Lenders don't care about your property. They care about how much of it is actually theirs if things go wrong.

That's the whole logic behind LVR. If you default on a loan with a low LVR, the lender can sell the property and comfortably recover what they lent you, even if the market dips. If you default on a loan with a high LVR, there's a lot less room for error — a small drop in property values could mean the lender doesn't get all their money back. Higher LVR means higher risk to the lender, and lenders price risk.

That's why 80% is the number everyone talks about. Borrow up to 80% of the property's value and you're in the safest zone from a lender's perspective. Go above 80% — say you only have a 10% deposit, putting you at 90% LVR — and most lenders will require you to pay Lenders Mortgage Insurance, or LMI.

LMI is a one-off (though sometimes able to be added to your loan) insurance premium that protects the lender, not you, if you default and the sale of the property doesn't cover the outstanding debt. It can add anywhere from a few thousand to tens of thousands of dollars to your costs, depending on your LVR and loan size. The higher your LVR climbs above 80%, the more LMI typically costs.

There are a few ways to bring your LVR down. The most obvious is a bigger deposit — every extra dollar you save reduces how much you need to borrow relative to the property's value. Buying a less expensive property has the same effect. Some buyers also use a guarantor, where a family member's property is used as additional security, effectively reducing the LVR on paper without requiring a larger cash deposit.

LVR doesn't just determine whether you pay LMI — it also influences the interest rate you're offered. Many lenders price their rates in LVR tiers, so a loan at 70% LVR might get a noticeably better rate than the same loan at 90% LVR, even for otherwise identical borrowers. Lower risk to the lender translates into a better deal for you.

Working out your ideal LVR position — and which lenders are most competitive at that level — is exactly the kind of detail a good broker earns their keep on. Lender policies on LVR thresholds and LMI vary more than most people expect, and the right broker will know which lender treats your specific LVR position most favourably.