What is LVR for a first home buyer?

So, what is LVR? Loan to value ratio (LVR) is the amount of your loan as a percentage of the value of the property you are buying. You work it out by dividing the loan amount by the property value. It is one of the first numbers a lender looks at, because it shows how much of the purchase you are funding with borrowed money and how much with your own deposit. For a first home buyer, your LVR shapes the deposit you need, whether you pay lenders mortgage insurance, and how lenders read your application.

This guide is the loan to value ratio explained in plain terms: what LVR is, how to work it out, the 80 per cent threshold that matters most, and what your number means when you are buying your first home.

What is LVR in home loans

Your deposit sets the size of your loan compared with the property value, and lenders call that the loan to value ratio. According to MoneySmart, the loan to value ratio is the amount of a loan as a percentage of the value of the asset it was used to buy, calculated by dividing the loan amount by the value of the asset. In short, your LVR is the slice of the property price you are borrowing. The rest is your deposit.

A worked example makes it clearer. MoneySmart shows a 450,000 dollar loan on a 600,000 dollar property, which is an LVR of 75 per cent. Lift the deposit and the LVR falls. Lower the deposit and the LVR rises.

Lenders pay attention to this because a lower LVR means you have more of your own money in the property, so there is more of a buffer if values move or the loan cannot be repaid. A higher LVR means the lender is funding more of the purchase, which they generally treat as carrying more risk.

If you are early in the process, the broader picture sits on our first home buyers hub, where the deposit, LMI and scheme decisions come together.

How to work out your LVR

You can work out your own LVR with two numbers: the amount you plan to borrow and the value of the property.

Using the MoneySmart example, 450,000 dollars divided by 600,000 dollars is 0.75, and multiplied by 100 that is an LVR of 75 per cent. The same maths works for any price and any deposit.

If you do not yet know how much you can borrow, that is the place to start, because your borrowing power and your deposit together set your likely LVR. A borrowing calculator gives you a realistic figure to work from rather than a guess.

Try the borrowing power calculator

The 80 per cent threshold and lenders mortgage insurance

The single most important LVR figure for a first home buyer is 80 per cent.

Lenders mortgage insurance (LMI) protects a credit provider if borrowers are unable to repay their loan. MoneySmart explains that it is usually a one-off cost to a home loan borrower, payable when the amount borrowed exceeds 80 per cent of the value of the property, and that LMI does not benefit the borrower, it only protects the lender. MoneySmart also notes that if your LVR is above 80 per cent, you may need to pay lenders mortgage insurance.

So the 80 per cent mark works in two directions, and both describe the same position:

This is why a 20 per cent deposit is talked about so often. It is the deposit that takes your LVR to 80 per cent and generally keeps LMI off the table. MoneySmart also points out that a larger deposit means you borrow less, so your loan costs less, and that it can help you show a lender you can save and manage money.

What is a good LVR for a first home buyer

There is no single right LVR, and a good level depends on your circumstances and lender criteria. A lower LVR generally gives you more options and avoids LMI, but it takes longer to save. A higher LVR can get you into the market sooner, with LMI or a scheme bridging the gap.

A few reference points help you read your own number:

• At or below 80 per cent LVR, you generally avoid LMI and have a wide range of lenders to choose from.
• Above 80 per cent LVR, you can still borrow, but LMI may apply and fewer lenders may be open to you, depending on how high the LVR goes.
• A deposit as small as 5 per cent, which is a 95 per cent LVR, may be possible through a government scheme, though a higher LVR outside a scheme usually comes with LMI.

What is my LVR if I buy with a smaller deposit

If you cannot reach a 20 per cent deposit yet, a higher LVR does not put home ownership out of reach. There are recognised paths for a first home buyer buying with less.

The Australian Government 5 per cent Deposit Scheme is one. MoneySmart notes that this scheme lets eligible first home buyers purchase a home with a deposit as small as 5 per cent, without paying lenders mortgage insurance. That means you could buy at a 95 per cent LVR and still avoid the premium, if you meet the eligibility rules. Whether you qualify depends on the scheme rules and lender criteria.

Some buyers also use a family guarantor to lift their effective deposit and bring their LVR down, which can reduce or avoid LMI. Whether this is available, and whether it suits your family, depends on your circumstances and lender criteria. You can read more on how others reduce or avoid the premium in our guide on how to avoid LMI.

How your LVR fits your first home buyer plan

Your LVR is not a standalone number. It connects to your deposit goal, your borrowing power and the upfront costs of buying. Knowing it early helps you decide whether to push for a 20 per cent deposit, weigh up LMI, or look at a low-deposit scheme. If you are mapping out the bigger picture, the first home buyers hub brings the deposit, LMI and scheme decisions together in one place.

Talk it through

LVR sounds technical, but it comes down to one ratio you can work out in a minute, and it drives some of the biggest decisions in your first purchase. If you would like a clear view of your likely LVR, what it means for LMI, and the options open to you across multiple lenders, the team at Finance Lab can walk you through it.

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