What is loan to value ratio (LVR)?
Loan to value ratio (LVR) is the percentage of a property's purchase price or value that a lender will advance as a loan, calculated by dividing the loan amount by the property value and multiplying by 100.
LVR is a measure lenders use to determine how much of a property's value they will lend. It is expressed as a percentage and calculated by dividing the loan amount by the property value, then multiplying by 100. For example, if you buy a property worth $500,000 and borrow $400,000, your LVR is 80 percent.
Lenders use LVR to manage their risk. A higher LVR means the borrower has less equity in the property, so the lender has less margin if property values fall or the borrower defaults. This is why mortgages with LVRs above 80 percent typically require lenders mortgage insurance (LMI) in Australia. A lower LVR, such as 60 percent, signals lower risk to the lender and often qualifies for better interest rates.
In the Sydney property market, LVR directly influences both approval chances and loan terms. The team with a larger deposit can achieve a lower LVR, which improves their negotiating position with lenders. Mortgage brokers assess LVR as part of their serviceability checks and use it to match borrowers with the most suitable lenders and loan products. Understanding your LVR is essential when comparing mortgage offers, as it affects whether you need insurance and what interest rate you will receive.