LVR calculator

What is LVR, and how do you work it out?

LVR, or loan to value ratio, is the size of a loan expressed as a percentage of the value of the property securing it. A $600,000 loan against an $800,000 property is an LVR of 75%. The other 25%, or $200,000, is your equity, and on a purchase that equity is your deposit.

A lower LVR means the lender is further from a loss if prices fall and the property has to be sold. That is the whole reason the number carries so much weight, and it is why the same borrower gets a different answer at 65% than at 91%.

It changes over time without you touching it. Every repayment lowers the balance, and every movement in the property's value moves the denominator, which is why LVR is worth checking again before a refinance rather than assuming the figure from settlement day still holds.

How to use this loan to value ratio calculator

Three inputs, and one of them is a slider you should actually move.

1. 1

   Property value

   What the property is worth. On a purchase use the price you are paying, but read the section below on valuations before you treat that as settled.

2. 2

   Loan amount

   The loan you are asking for, or the balance you owe today if you are checking an existing loan.

3. 3

   Target LVR

   Anywhere from 50% to 95%. Set it to 80% to see what it takes to get out of lenders mortgage insurance territory, or lower if you are chasing a better band.

• Your LVR as a percentage, as the headline figure
• Your equity, or your deposit on a purchase, in dollars
• That equity as a percentage of the value
• Whether you are above or below the 80% mark
• The loan amount that would put you at your target LVR
• How much you would need to repay, or add as deposit, to get there

It is a calculation, not a credit decision. Nothing here checks your income, your expenses or your credit file, and the value you enter is your opinion until a lender's valuer forms one of their own.

It is the lender's valuation, not the price you paid

LVR is worked out on the value the lender accepts, which comes from its valuer. Not what you paid, not what the agent said, and not what a listing site estimates. On a purchase the lender will usually take the lower of the contract price and the valuation.

A valuation coming in low is the most common way an LVR moves against you. Say you buy at $800,000 with a $640,000 loan, expecting a tidy 80%. The valuer says $760,000, and that same loan is now an LVR of 84.2%.

Nothing about you changed and the fix is cash. An 80% loan against $760,000 is $608,000, so you would need to find $32,000 more to stay where you thought you already were. That is the gap that turns a comfortable purchase into a scramble in the fortnight before settlement.

Why lenders price in LVR bands

Lenders do not price LVR on a smooth curve. Some price by loan to value ratio in tight bands, so an extra $5,000 of deposit moves you into a cheaper tier, and the dollars you added bear no relationship to what they bought you.

The 80% mark is the biggest step of the lot, because it is where lenders mortgage insurance normally stops applying. Crossing it changes the cost of the loan, not just the rate on it.

The bands cut the other way too. On an $800,000 property a loan of $640,000 is exactly 80%, and borrowing another $5,000 puts you at 80.6%, which is over the line. Five thousand dollars of extra borrowing can cost far more than five thousand dollars.

Where the bands sit differs between lenders and none of them publish a comparable table. Knowing which lender's steps your particular number falls between is a large part of what a broker with a full panel is for.

LVR on a refinance, and on an investment property

On a refinance, LVR is usually the good news. The balance has come down and the value has often gone up, and both push the ratio in your favour without you having done anything deliberate.

Take a property bought for $600,000 with a $540,000 loan, which was a 90% LVR at settlement. If it is now worth $750,000 and the balance is $500,000, the LVR is 66.7%. That is a different conversation with a lender entirely.

The catch is that the new lender decides what the property is worth, and a valuation for a refinance is often more conservative than what a selling agent would tell you. Work on the lender's figure, not the listing site's.

Investment lending is treated more carefully. Some lenders cap the LVR they will accept on an investment property below what they allow an owner occupier, and the property type can cap it further, with restrictions by postcode, size or use.

LVR and serviceability are two separate hurdles

You have to clear both, and they have almost nothing to do with each other. LVR asks whether the security is strong enough. Serviceability asks whether your income covers the repayment when it is tested at a rate well above the one you would pay.

• A large deposit does not rescue a file that cannot service the loan
• A strong income does not remove lenders mortgage insurance below 80%
• Both are assessed against the lender's policy, not against your view of your finances
• The smaller of the two answers is your real limit

People with plenty of equity and modest income fail the second test regularly, particularly on a refinance where the buffer applies to the new loan. People with strong income and a thin deposit clear serviceability and still pay for insurance.

Run the borrowing power calculator next to this one so you can see both. Then bring us the two numbers, and we will match them to the lender on our panel of 40 or more whose policy fits, which is a quote from a lender rather than an estimate from a page.