Home loan-to-value ratio (LVR) explained

LVR and your deposit

While homebuyers may tend to think in terms of how much deposit they have and ‘property price’, banks tend to talk about LVR and their assessment of the value of the property. So when working out your LVR, remember to base it on the bank’s valuation (if you have one) rather than the price you’re prepared to pay.

A lower LVR means less risk for us

Let’s say a borrower could no longer make repayments, and the bank had to sell the property. With an LVR below 80%, there’s less risk to the bank, as the property’s market value is more likely to cover the cost of the loan.

An LVR over 80% means there’s a higher risk that the bank wouldn’t recover the full loan amount, as the sale price may not cover the amount borrowed. This means your interest rate may be higher and you’ll likely need to pay Lenders Mortgage Insurance (LMI), to offset the higher risk.

Lenders Mortgage Insurance, for an LVR over 80%

Generally, if your deposit’s less than 20% and/or your LVR’s over 80%, you might still be able to get a loan if you pay LMI, though the interest rate might be higher.

Bear in mind, LMI insurance protects the lender, not you. If you default on your home loan and your property sells for less than what you owe, you’ll still be liable to pay the shortfall.

How is LVR calculated?

You can calculate the loan-to-value ratio by dividing the loan amount by the bank valuation – the value the lender calculates for the property (this may not necessarily match the market value – more on that below).

Let’s say you want to buy a place for $510k, the bank valuation is $500k, you have a $60k deposit and want to borrow $450k. You’ve also factored in other costs, like stamp duty, LMI and legal expenses. We’ll use the bank valuation – not the purchase price – in the calculation of your LVR.

Example:

• Dividing $450,000 by $500,000 will give you 0.9
• Multiply by 100 to get a percentage (0.9 x 100 = 90%)
• Your LVR will be 90%.

With 90% LVR, you’ll need to pay LMI costs and your loan might have a higher interest rate. But if you borrowed only $400k and increased your deposit to $110k, you’d bring your LVR down to 80%.

Example:

• Dividing $400,000 by $500,000 will give you 0.8
• Multiply by 100 to get a percentage (0.8 x 100 = 80%)
• Your LVR will be 80%.

In addition to the initial deposit, keep in mind that there may be other costs to factor in when buying a home, such as stamp duty and legal costs. Read more about the upfront costs involved in buying a property.

A guarantor can also lower your LVR  

Saving a 20% deposit can take years, especially if it’s your first place. But there is a way for your family members to help you buy earlier, by acting as a guarantor for part of your home loan. It’s called the Bank of Melbourne Family Pledge^{^}, and it’s designed to lower your LVR and therefore help you reduce or avoid paying LMI.

Bear in mind, your family member would be liable for the amount agreed in the Family Pledge guarantee. So if you’re not able to pay your loan – and your family member doesn’t have the cash to pay Bank of Melbourne (if asked) – your family member’s house could be sold to cover it. You can read more about our Family Pledge here. 

How to get a bank valuation

There’s a difference between the market value (which is the price you pay for the property) and the bank’s valuation, which is influenced by things like location, property attributes, zoning areas, public transport and schooling.
Once you’ve applied for your home loan and you’re looking for full approval, we’ll arrange for an online bank valuation based on similar sales and local property market trends. If need be, we’ll arrange for an on-site valuation too. For private sales we can organise a bank valuation during the cooling off or finance period, so you’ll know if there’s any shortfall you need to cover. If it’s an auction, talk with us before bidding, as your bank valuation might only happen after the auction.

In summary

Your loan-to-value ratio directly affects the loan we can offer you:

• Your LVR is your loan amount divided by our property valuation 
• The higher your LVR, the higher your interest rate and loan insurance costs might be
• You’ll likely pay loan insurance costs if your LVR’s over 80% 
• There are options which could lower your LVR 
• Talk with us about a bank valuation before you buy or bid.