Loan to Value Ratio Calculator: What It Means For Your Rate
Calculate your Loan to Value Ratio (LVR) and discover how it impacts your home loan interest rate, lender risk, and refinancing options.
What is Loan to Value Ratio (LVR) and Why Does It Matter?
Loan to Value Ratio (LVR) is a key financial metric that compares the size of your home loan to the value of your property. Lenders use LVR to assess the risk of lending money to borrowers. The higher the LVR, the greater the perceived risk for the lender.
For instance, if your home is valued at $500,000 and you have a loan of $400,000, your LVR is calculated as: (Loan Amount ÷ Property Value) x 100 = LVR ($400,000 ÷ $500,000) x 100 = 80% LVR
This ratio is critical because it influences the interest rate you’ll be offered, your ability to borrow, and whether you’ll need to pay for Lender’s Mortgage Insurance (LMI).
How Do Lenders Use LVR to Assess Risk?
Lenders categorise LVRs into specific risk bands. The lower your LVR, the lower the risk you present to the lender. Borrowers with a lower LVR typically qualify for better interest rates. Here’s how lenders see it:
| LVR Category | Risk to Lender | Impact on Interest Rate |
|---|---|---|
| ≤ 50% LVR | Lowest Risk | Best rates and most flexible options |
| 51% - 60% LVR | Very Low Risk | Slightly higher rates but still very competitive |
| 61% - 70% LVR | Low Risk | Still qualifies for good rates, but may lose access to 'premium' deals |
| 71% - 80% LVR | Medium Risk (Typical New Borrower) | Access to standard variable rates with potential lender discretion |
| 81% - 90% LVR | High Risk | Higher rates and most likely to require Lender’s Mortgage Insurance (LMI) |
| > 90% LVR | Very High Risk | Significantly higher rates, most restrictive lending terms, and LMI usually required |
The sweet spot for many borrowers is at 80% LVR, as it’s the starting point for most new loans and avoids the cost of LMI. Borrowers should aim to reduce their LVR over time to qualify for lower rates.
How LVR Impacts Your Home Loan Interest Rate
Lenders price their interest rates based on the perceived risk of each LVR band. Borrowers with a lower LVR are seen as safer, so they get access to cheaper loans. But as the LVR increases, so does the lender's risk, leading to higher interest rates.
Here’s a snapshot of how LVR affects interest rates:
- **Low LVR (≤ 60%): Borrowers in this band enjoy the best home loan rates.
- Moderate LVR (61% - 80%): This is where most borrowers start, especially first-time buyers. While rates remain competitive, they are typically not as good as lower LVR bands.
- High LVR (81% - 90%): Rates increase as lenders require LMI, which adds to the overall cost of borrowing.
- Very High LVR (> 90%): Borrowers face higher rates and stricter conditions since lenders see them as the highest risk.
Why It’s Critical to Monitor and Refinance Based on LVR
Many borrowers assume that once they’ve signed a 30-year loan, they’re stuck with the same rate for life. This is false. As your loan balance decreases and your property value increases, your LVR improves.
Here’s why this matters:
- Banks Don’t Automatically Reduce Your Rate: Lenders will happily let you stay on a higher rate, as they profit from your inaction.
- You Can Renegotiate Your Rate: If your LVR shifts from 85% to 70% due to loan repayments or property appreciation, you may qualify for a better rate.
- Refinancing May Be Necessary: If your lender won’t offer a better rate, refinancing to a new lender can reduce your interest costs. Pro Tip: Use an LVR calculator to track your current LVR and determine if you can negotiate for a better rate.
How to Calculate LVR (Loan to Value Ratio) Using an LVR Calculator
Calculating your LVR is simple. Use the following formula: LVR = (Loan Balance ÷ Property Value) x 100
To avoid manual calculations, you can use an LVR calculator. Here’s how it works:
- Enter your current home loan balance.
- Input your property’s current market value (you may need a property valuation).
- The calculator will instantly display your current LVR. Knowing your LVR allows you to see what rates you may qualify for. Some LVR calculators even show a competitive rate for each LVR range, giving you a clear understanding of what to aim for.
How LVR Categories Affect Your Home Loan Strategy
Here’s how you should think about each LVR category:
- ≤ 50% LVR: Consider refinancing for better rates if you haven’t already.
- 51% - 60% LVR: Still in a strong position, so keep an eye on rate offers.
- 61% - 70% LVR: You may have access to mid-tier rates, so it’s worth negotiating.
- 71% - 80% LVR: This is where most borrowers start. Focus on reducing your balance to cross into the 70% LVR band.
- 81% - 90% LVR: High-risk band, often subject to Lender’s Mortgage Insurance (LMI). Reduce your loan balance as soon as possible.
- > 90% LVR: Prioritize reducing your debt to get to a lower band. Lenders are unlikely to offer competitive rates.
Frequently Asked Questions
What is LVR in a home loan?
LVR (Loan to Value Ratio) is the percentage of your property’s value that is financed by a loan.
What is a good LVR?
A good LVR is typically 80% or lower. This avoids Lender’s Mortgage Insurance (LMI) and opens up access to better rates.
What is LVR in banking?
Banks use LVR to determine borrower risk. The higher the LVR, the higher the perceived risk for the bank, which results in higher interest rates.
How can I calculate my LVR?
Use an LVR calculator by entering your current loan balance and your property’s value. It will instantly show your LVR.
Does my LVR change over time?
Yes. As you pay down your loan or if your property value rises, your LVR improves, making you eligible for better rates.
Can I reduce my interest rate as my LVR changes?
Yes, but banks won’t offer it automatically. You may need to negotiate or refinance to a lender that recognizes your improved LVR.
Final Thoughts on LVR and Your Home Loan
Your Loan to Value Ratio (LVR) plays a pivotal role in how banks assess your borrowing risk. It directly affects the interest rates you’re offered and determines if you’ll need to pay for Lender’s Mortgage Insurance (LMI).
Key Takeaways:
- Most borrowers start at 80% LVR.
- Lenders won’t reduce your rate automatically as your LVR improves.
- You can use an LVR calculator to track your progress and negotiate better rates.
By actively monitoring your LVR, you’ll be better positioned to reduce your mortgage costs and secure lower interest rates. Don’t fall victim to bank apathy — stay proactive and ensure your home loan remains competitive.
For more guidance on improving your LVR, refinancing, or calculating your Loan to Value Ratio, use our handy LVR calculator. It’s fast, easy, and can save you thousands over the life of your loan.
Disclaimer: The opinions expressed in this article are strictly for general informational and entertainment purposes only and should not be taken as financial advice or recommendations.