Loan-to-Value Ratio

The loan-to-value ratio - LVR - is the loan amount divided by the property's value, expressed as a percentage. Lenders use the lower of the purchase price and the valuation, so the ratio is usually the worse of the two numbers. A $600,000 loan on a $750,000 purchase is an 80 percent LVR; borrow $675,000 on the same property and the LVR is 90 percent. The ratio recalculates over time as the loan is paid down and the property's value moves.

The number matters because it is the input lenders price risk against. At or below 80 percent, most borrowers get the standard rate and skip lenders mortgage insurance entirely; above 80 percent, LMI is typically required and the rate can be higher. Government guarantees - the 5% Deposit Scheme and the Family Home Guarantee - let eligible buyers borrow 85 to 98 percent without LMI by covering the shortfall to 80 percent. Every lender's pricing table runs on the same input, which is why the LVR is the first number to optimise.

Walk one purchase. You buy at $750,000 with a $100,000 deposit and a $650,000 loan: the LVR is 86.7 percent, which puts you into lenders mortgage insurance territory and possibly a higher rate. To land at 80 percent you would need a $150,000 deposit - every $10,000 of extra deposit lowers the loan and moves the ratio by roughly 1.3 percentage points. The LTV calculator runs the arithmetic on your own deposit and target price.

Time is the second lever. The $750,000 property growing at 4 percent a year is worth roughly $843,000 after three years, and the loan paid down to $620,000 lands the LVR at 73.5 percent - below 80 percent, refinancing without LMI becomes possible. The ratio also moves in reverse: a valuation that comes in below the purchase price raises the LVR on the same loan, which is why lenders use the lower of the two. The LMI calculator prices what the ratio costs above 80 percent.

The guarantees shortcut the arithmetic. The 5% Deposit Scheme lets eligible first-home buyers purchase with a 5 percent deposit - a $37,500 deposit on a $750,000 property is a 95 percent LVR without LMI, because the government guarantees the shortfall. The Family Home Guarantee supports eligible single parents with a deposit as low as 2 percent. Eligibility rules apply, and the schemes carry property price caps.

For an Australian reader, the LVR is the single number that decides whether you pay lenders mortgage insurance, whether you get the standard rate, and how much deposit the purchase actually needs. MoneySmart's guidance on buying a home points at the threshold directly: above 80 percent, LMI protects the lender and costs you thousands; below it, the pricing tables open up. The lenders mortgage insurance entry covers what the threshold costs above 80 percent. The ratio also moves as you pay the loan down, which is why refinancing at 80 percent is the standard play to escape LMI.

A colleague named Brent (yes, that Brent) bought at a 92 percent LVR and paid a five-figure LMI premium capitalised into the loan. Two years later he refinanced at 88 percent - and paid again, because LMI is non-refundable and non-transferable. The ratio was the number he never checked. The highest-leverage thing most Australians can do is target 80 percent or use a guarantee scheme to skip LMI entirely, and run the deposit arithmetic through the house affordability calculator before the auction.