If you are thinking about buying an investment property, you will hear one term again and again: loan-to-value ratio, or LVR. It sounds technical, yet it is one of the simplest and most important numbers in property finance. It affects how much you can borrow, how much you pay and how lenders see you as a borrower.
This guide explains what LVR is, how to calculate it and what lenders look at alongside it. This article provides general information only and is not financial advice. Speak to a licensed adviser about your situation.
What Is a Loan-to-Value Ratio?
LVR compares the size of your loan with the value of the property. It is shown as a percentage.
LVR = Loan amount ÷ Property value × 100
For example, if you buy a property valued at $700,000 and borrow $560,000, your LVR is 80%. The remaining $140,000 is your deposit or equity.
A lower LVR means you have more of your own money in the property, which generally lowers risk for the lender. A higher LVR means you are borrowing more relative to the value.
Why Do Lenders Care About LVR?
If a borrower cannot repay, the lender may need to sell the property to recover the loan. The lower the LVR, the more cushion there is if property values fall. That is why LVR influences:
- Whether your loan is approved
- The interest rate you are offered
- Whether you must pay Lenders Mortgage Insurance (LMI)
- How much you can borrow against a given property
The 80% Benchmark and LMI
In Australia, an LVR of 80% or less is a common benchmark. Borrowers above 80% are usually asked to pay Lenders Mortgage Insurance, a one-off premium that protects the lender, not the borrower, if the loan defaults. The cost depends on the lender, the loan size and the LVR, and it can be significant.
Some lenders will go to 90% or higher for certain borrowers and properties, but the terms may be tighter, and not all properties qualify. Investors in particular often face stricter limits than owner-occupiers.
What Lenders Look at Besides LVR
LVR is only one part of the picture. Lenders also assess:
- The property valuation. Lenders rely on their own valuation, which may differ from the purchase price. LVR is calculated on the lower of the two figures, so a low valuation can raise your LVR unexpectedly.
- Property type and location. Some lenders limit lending on small apartments, high-density developments, rural land or locations with weak demand. These properties may attract a lower maximum LVR.
- Your income and borrowing capacity. Lenders test whether you can afford repayments, including at a higher “buffer” interest rate. Stable employment and verifiable income help.
- Your expenses and existing debts. Credit cards, personal loans, car finance and other mortgages reduce what you can borrow. Even unused credit card limits can count.
- Your deposit and savings history. Many lenders want to see that your deposit comes from genuine savings or equity, not just a recent windfall.
- Your credit history. Missed payments, defaults and frequent credit applications can affect approval and pricing.
- Investor or owner-occupier status. Rates and limits can differ between the two, and investment loans are often priced slightly higher.
Using Equity to Invest
If you already own property, your LVR on that property can show how much equity you have available. Equity is the difference between your property’s value and your loan. For example, if your home is worth $900,000 and you owe $500,000, your current LVR is about 56%. Many lenders may allow you to borrow up to a set LVR, such as 80%, which could free up usable equity, subject to their assessment and your capacity to repay.
Using equity can help build a deposit for an investment, but it also increases your overall debt, so it needs careful planning.
Simple Ways to Improve Your Position
- Save a larger deposit to reduce your LVR
- Reduce or close unused credit cards and pay down other debts
- Build a clear savings history
- Choose properties that lenders view favourably
- Compare lenders, since policies and maximum LVRs vary
- Get advice early, before you sign a contract
Why Independent Advice Matters
Lender policies change frequently, and the right structure for one investor can be wrong for another. This is where an experienced team makes a difference. At Your Property People, we take a step-by-step approach, coordinating finance, property and planning professionals so your decisions fit your goals. You can learn more about what we do and how we do it, or meet the team.
For more investing insights, visit YPP News or subscribe to our Your Property Perspective newsletter. When you are ready to talk about your plans, get in touch for a free consultation.
FAQs
What is a good LVR for an investment property?
Many borrowers aim for 80% or lower to avoid LMI, though some lenders will lend higher. The right level depends on your finances and risk comfort.
How do I calculate my LVR?
Divide your loan amount by the property value and multiply by 100.
Does LVR affect my interest rate?
Often, yes. Lower LVRs can attract better pricing, depending on the lender.
What is Lenders Mortgage Insurance?
LMI is a premium usually charged when your LVR is above 80%. It protects the lender if you cannot repay.
Can I use equity in my home to buy an investment property?
Possibly. Lenders assess your equity, income and ability to repay. A finance professional can explain your options.