A loan to value ratio, or LVR,  refers to how much you borrow (loan amount) as a percentage of the total value of the home or investment property you plan to buy.

Loan to Value Ratio is calculated by dividing the loan amount by the actual purchase price or valuation of the property, then multiplying it by 100

Example: If wanting to purchase a $500,000 property and you have a cash deposit of $100,00, you will be seeking to borrow $400,000 or $400K/$500K = 80%

Lenders assess borrowers on a large number of criteria, but those borrowing a smaller loan to value ratio are considered to be less of a risk and therefore more likely to be approved.

LVRs offered by lenders vary over time, influenced by the financial institution’s appetite for risk which in turn is influenced by the performance of the economy, government policy and demand for loans.

Borrowers who aren’t able to provide a 20% or greater cash deposit or equity in existing property are considered to be a higher risk and therefore lenders will apply lender’s mortgage insurance to the cost of borrowing. This insures the lender in case of loan default.

The bank will assess the value of the intended purchase on the basis of a valuation. Bank valuations are inherently conservative, they are done to protect the bank’s balance sheet and the interests of its shareholders and differ to a ‘market valuation’.


Example: If you want to purchase a property for $500,000 and want to borrow $400,000, if the bank valuation comes in at $480,000, the 80% that will be funded is $384,000 or $480,000 x .8

In this case you would need to come up with the additional $16,000 to be able to proceed on the purchase. If you have sufficient equity as opposed to cash, you can often offer more equity as security and proceed despite the shortfall in the valuation. This is a reason for not stretching your borrowing capacity and purchasing well within it.