What is LVR?

The term LVR stands for loan to value ratio. It’s a commonly used acronym when discussing home loans and property purchases. Your loan to value ratio expresses the amount you owe on your home loan as a proportion of the value of your home.

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What is LVR?

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LVR stands for Loan to Valuation Ratio.

Even though LVR sounds a little bland, it’s worth understanding, because LVR lets you know how much of your property you own.

If you owe $500,000 on a property formally valued at $1 million your Loan to Valuation Ratio is 50%. You own half your property.

Why is this important? Because the lower your LVR, the more of your property you own.

And at Bendigo Bank with our Complete Home Loan, that could mean a lower interest rate. Yep, that’s sweet alright!

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How do I calculate my loan to value ratio?

You can calculate your loan to value ratio by dividing your loan amount by the total value of your home and multiplying that by 100.

For example, if you purchase a home worth $500,000 with a $100,000 deposit and a $400,000 loan, your loan to value ratio (LVR) is 80 per cent. 

$400,000 (your loan amount) ÷ $500,000 (your home’s value) = 0.8 x 100 = 80%

Lenders and brokers will take your LVR into account when assessing how much you can afford to borrow for your home loan, and potentially show you different available loans based on varying loan to value ratios.

Why does your loan to value ratio matter?

Your loan to value ratio affects how much confidence a bank or lender has in lending to you. The lower your LVR, the more of the home you own and the lower the risk in lending to you.

An LVR of 80 per cent or below is considered lower risk than those above 80 per cent. Often lower interest rates are available to borrowers with lower LVRs.

Higher LVRs are the result of putting down a smaller deposit on a home you’re buying. If you have a 5 per cent deposit, your LVR is 95 per cent. Property values fluctuate regularly, which makes higher LVRs riskier.

For example, if your property value falls by more than 5 per cent when you have a 95 per cent LVR, you risk your loan balance exceeding the value of your property. If you defaulted on your loan, your lender wouldn’t be able to recoup the funds by repossessing and selling your property.

Your LVR matters most when you’re first purchasing your property, as it’ll play a role in defining your borrowing power. However, your LVR will change over the life of your home loan, which is important if you want to refinance, access equity or obtain a more favourable interest rate.

What affects your loan to value ratio?

Initially, your loan to value ratio is based on your property price and the amount you borrow to purchase it. But it’s important to remember your LVR isn’t linear and can change regularly. Your LVR can decrease as you pay down your loan balance or if your property value increases, and your LVR can increase if your property value falls.

Ultimately, your LVR is always changing, but it pays to keep an eye on it if you’re planning on making changes to your home loan in the future. A bank or broker will be able to assist you in determining the best course of action based on your loan to value ratio (LVR) and other aspects of your borrowing profile.

If your loan to value ratio has changed, it might be time for a home loan health check! Click here for more information about Bendigo Bank’s free home loan health check.