Entering the Australian housing market can feel overwhelming, especially with property prices steadily on the rise all over the country.
One of the ways prospecting homeowners can break through the housing market is by taking out a loan. Loans allow buyers to acquire a lump-sum payment that they can use to further their goals, and in this case, it’s to put a stake in the local housing market.
That said, loans aren’t given to just anyone who asks: lenders evaluate the borrower’s profile before they can hand them a loan deal. They will gauge your inherent riskiness, looking into factors such as your income, savings, debts, expenses, and employment stability. They’ll also look into the value of the property you want to buy.
As a borrower, you should also be aware of both these factors, and there’s a metric that covers them: that’s the LVR. Also known as the loan-to-value ratio, LVR is the percentage that shows how much of the property’s value you want to borrow.
For new buyers, understanding LVR is crucial as this metric can influence your loan approval chances, as well as the type of loan deal you’ll eventually receive from the lending company you contacted.
If you want to understand this concept more, then read on. Let’s get to the bottom of LVR and how it can affect new property buyers.
What is LVR?
Before anything else, it’s important to understand what LVR actually means. LVR, or loan-to-value ratio, is a percentage that compares the amount you want to borrow against the value of the property you want to buy.
It has a formula that is expressed as such:
LVR = Loan amount ÷ Property value × 100
Suppose that a property is valued at $800,000, as appraised by the lending institution. And further suppose that you plan to borrow $600,000 from the same lending institution.
This means that 75% of the property’s value is covered by the loan, while the remaining 25% comes from out of your pocket. The 75% is the LVR, in this case.
Having a lower LVR is generally better in the eyes of lenders, because it means you’re borrowing a smaller portion of the property’s value and contributing your own money through a deposit.
Furthermore, if your LVR exceeds 80%, you’re typically going to trigger lenders' mortgage insurance, or LMI. This is an added cost that protects the lender if you’re unable to repay the loan.
Because of this, many first-time buyers aim for an LVR of 80% or lower, where possible, as this can keep upfront property costs low while simultaneously increasing the odds of a successful loan application.
If you want to learn more, you can read up on the matter at Westpac’s guide to LVR.
Why LVR matters to new buyers
LVR matters to new buyers because it’s a crucial factor that lenders use to assess your home loan application.
The ratio is used to show the breakdown of how much of the money spent is from one’s own pocket and how much is borrowed, giving investors a clear understanding of the risk they may be taking on by collaborating with a particular buyer.
Besides that primary function, there are other reasons why LVR may matter. Here they are in greater detail:
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Loan approval chances
A low LVR is a sign that you have sufficient liquid capital to take on a loan deal with enough avenues to pay back.
This metric, alongside positive factors such as a stable income, good savings history, and employment records, assures lenders that you can pay your dues on time, increasing your chances of a favourable loan approval.
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Loan terms and options
Your LVR can also influence the type of loan terms and options available to you.
If your LVR is low, lenders may view your application more favourably because you’re borrowing a smaller portion of the property’s value. This can give you access to more competitive loan products, better repayment structures, or more flexible borrowing conditions.
On the other hand, a high LVR may limit your options. Some lenders may impose stricter requirements or restrict the loan products you can take in the first place. In some cases, you may still be approved, but a loan may have less favourable terms compared to what a lower-risk borrower could receive.
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Lender mortgage insurance
Lastly, lender's mortgage insurance, or LMI, is another crucial LVR-related cost new buyers should know about. In Australia, LMI is typically triggered when your LVR is above 80%, meaning you’re borrowing more than 80% of the property’s value.
This insurance protects the lender if the borrower is unable to repay the loan. Even though the lender receives the protection, the borrower is usually the one who pays for it. Depending on the lender, LMI may be paid up front or added to the total loan amount.
For first-time buyers, LMI can increase the borrower’s odds of entering the property market sooner with a smaller deposit. However, it can also increase the total cost of the loan. This is why many buyers aim for a lower LVR where possible, especially if they want to reduce extra borrowing costs before settlement.
How to improve your LVR before applying
There are a few ways you, as the borrower, can improve your LVR to look more favourable when applying for lending applications.
One of these ways is by saving up for a larger deposit. Contributing more money upfront to correspond to your property’s value can naturally lower your LVR, as you won’t need to take out a big loan to afford the property.
You can also reduce your LVR by choosing a cheap property, thereby reducing the amount you’ll need to get as a loan. You could also wait until you get enough savings before buying a property in the market.
Another way to take advantage of more favourable loan deals is by vetting the different lending requirements. Each lender proposes risks that may appear differently from one another, so understanding their thresholds beforehand can help you stay informed on the best possible provider for your needs.
We hope that this article has helped you navigate the Australian housing market better. All the best in your property hunting endeavours!
DISCLAIMER:
This content is general information only and is not financial advice. It does not consider your personal circumstances, including your objectives, financial situation or needs. Independent advice should be obtained before making any financial decision. Any references to third‑party products or websites are provided for general information only.
