Unlocking Your Loan to Value Ratio (LVR)
When you’re buying your first home, Loan-to-Value Ratio (LVR) can feel like just another word that gets thrown around.
But when you actually understand what LVR means, and how it’s used, it becomes a powerful part of your strategy. It influences how much you can borrow, whether LMI applies, your interest rate, which lenders are available to you, and how much flexibility you’ll have over time.
In this resource, we’ll cover:
What Loan-to-Value Ratio (LVR) actually is and how it’s calculated
Why lenders care so much about LVR
How LVR affects risk, pricing, and loan options
How government schemes interact with LVR
How to think about LVR strategically
This resource supports Episode 23 of the First Home Unlocked Podcast: Unlocking Loan-to-Value Ratio (LVR).
What is Loan to Value Ratio (LVR)?
Loan-to-Value Ratio, or LVR, is an important calculation lenders use when assessing a home loan. Your LVR measures how much of the property’s value is being funded by the bank.
It’s calculated using a the following formula:
LVR = (Loan Amount ÷ Property Value) × 100
So, for example:
If you buy a property for $800,000 and borrow $640,000, your LVR is 80%. That means the bank is funding 80% of the purchase.
While the calculation itself is simple, what that number represents is far more important.
From the lender’s perspective, your LVR is a direct measure of risk. The higher the LVR, the more of the property the bank is funding, and the less buffer there is if property prices fall or your circumstances change.
Because of that, your LVR plays a big role in four key areas:
Whether Lenders Mortgage Insurance (LMI) applies
Higher LVRs usually mean LMI, unless you’re using a scheme or exemption.The interest rate you’re offered
Lower LVRs generally unlock sharper pricing and more lender options.How flexible or strict the bank can be with your application
At higher LVRs, lenders tend to be more conservative around income, expenses, and employment.How much usable equity you’ll have later on
Your starting LVR affects how soon you can refinance, renovate, upgrade, or invest in the future.
So while LVR might look like just another percentage on paper, it influences almost every part of your home loan journey.
Why LVR Matters to Lenders
From a lender’s perspective, LVR is a measure of risk.
The higher the LVR, the more of the property the bank is funding, and the less equity the buyer has upfront. That matters because equity acts as a buffer for you and the bank.
When the LVR is high:
You have less equity from day one
There’s less protection if property prices fall
And the lender is taking on more risk lending you the money for your loan
As a general rule of thumb:
80% LVR or below is considered lower risk
Above 80% LVR is considered higher risk and often triggers additional protections for the lender, such as Lenders Mortgage Insurance (LMI)
This is where the well-known 20% deposit idea comes from. A 20% deposit keeps your LVR at or below 80%, which removes the need for LMI and generally opens up more lender options.
It’s also important to remember that this isn’t just a 20% deposit, it’s 20% plus upfront costs, which is why saving that amount can feel so out of reach for many first home buyers.
For years, many buyers have believed they must save a 20% deposit before buying. But in reality, there are multiple pathways into the market, including:
The First Home Guarantee (5 per cent deposit, no LMI)
LMI waivers for certain professions
Family Guarantor Loans
Specific lender policies that allow borrowing above 80 per cent without LMI
Another key thing many buyers don’t realise is that banks price their loans in LVR tiers.
That means your interest rate can change depending on where your LVR sits, not just which lender you choose.
For example:
Under 60 per cent LVR → access to the sharpest rates and widest choice
60–80 per cent LVR → access to standard competitive rates
Above 80 per cent LVR → higher rates and tighter lending rules as LVR increases
And it’s not just about pricing, LVR shapes the bank’s lending policy.
As LVR rises, lenders may also:
Apply stricter income and expense assessments
Be less flexible with employment types or bonuses
Limit how much extra borrowing or future refinancing is available
So while LVR might seem like just a technical number, it influences how much choice, flexibility, and control you have both now and later.
LVR Under the First Home Guarantee (5% Deposit Scheme)
If you’re buying under the 5% Deposit Scheme (previously known as the First Home Guarantee), the way LVR works is a little different.
Under the scheme, eligible first home buyers can purchase a property with as little as a 5% deposit, meaning their actual loan-to-value ratio is up to 95%. Normally, a 95% LVR would trigger Lenders Mortgage Insurance (LMI) and stricter lending rules But with the First Home Guarantee, the government steps in as a partial guarantor for up to 15% of the property’s value.
What this means is:
Your lender treats the loan as if it were an 80% LVR
You don’t pay LMI
And you often gain access to similar interest rates and lending policies as someone who has saved a 20% deposit
So while your actual LVR is still high, the lender’s risk is reduced which is why the scheme works.
But it’s important to understand what the scheme does and doesn’t change. The guarantee removes LMI, but it doesn’t remove risk entirely.
You are still:
Borrowing a larger portion of the property’s value
Starting with less equity
And more exposed if prices fall or your income changes
This is why LVR still matters, even under the scheme. A higher starting LVR can affect:
How quickly you can refinance later
When you’re able to access equity
And how much flexibility you have in the early years of the loan
That’s why we always encourage buyers using the First Home Guarantee to think beyond just getting in. The question becomes, how do you balance entering the market sooner with managing the risks that come with a higher LVR?
For some buyers, the answer is building strong buffers, for others, it’s choosing a property with better long-term growth fundamentals and for many, it’s about having a clear plan for how and when they’ll reduce their LVR over time.
This is where working through the strategy properly really matters.
Used well, the First Home Guarantee can be an incredibly powerful stepping stone, but like any tool, it works best when it’s part of a broader plan, not the plan itself.
LVR & Equity
One of the most important things to understand about LVR is that it changes over time as two things happen:
You pay down your loan, and
Your property value moves with the market.
Both of those work together to lower your LVR and build equity.
What is equity?
Equity is simply the portion of your home that you actually own. It’s the difference between:
What your property is worth, and
What you still owe the bank.
So if your home is worth more than your loan balance, that difference is your equity.
What is usable equity?
Usable equity is the part of that equity the bank is comfortable letting you access.
Most lenders will allow you to borrow up to 80% of your property’s current value, even if your LVR is already lower than that. A simple way to calculate it is:
Usable Equity = (Property Value × 80%) − Current Loan Balance
For example let’s say:
Your property is now worth $800,000
80% of that is $640,000
Your remaining loan balance is $500,000
That means you’ve built $140,000 in usable equity.
This is the equity you could potentially use for things like:
Renovations
Investing
Buying your next home
Or refinancing to a better loan structure
This is where LVR and equity really come together. How quickly your LVR lowers depends heavily on what you buy. This is where the asset quality conversation becomes critical. When you buy a high-quality property, one with strong long-term demand, scarcity, and appeal its value is more likely to hold or grow over time.
That means:
Your equity builds faster
Your LVR falls sooner
And you gain more options earlier in your journey
As we covered in Episode 6: Unlocking Asset Quality, choosing the right property can have a big impact on your long-term position.
Final Thoughts: Use LVR as a Tool, Not a Trigger
Loan-to-Value Ratio can feel overwhelming when you first hear it especially with all the talk about deposits, risk, and bank rules.
A higher LVR doesn’t automatically mean you’re making a bad decision and a lower LVR doesn’t guarantee a good outcome.
What matters most is how your LVR fits into your broader strategy. Used well, LVR can:
Help you enter the market sooner when it makes sense
Support smarter lending options and flexibility over time
Create a clear pathway to refinancing and building equity
Used without a plan, it can:
Limit your options later
Increase pressure if life or income changes
Or push you toward the wrong property just to hit a number
The strongest outcomes come from:
Understanding how LVR actually works behind the scenes
Choosing a property with strong asset quality and long-term appeal
Using schemes or higher LVRs intentionally, with buffers in place
And having a clear plan for how your LVR improves over time
That’s how LVR becomes something that supports your journey.
If you want help working out what LVR makes sense for your situation, whether a scheme fits your plan, or how to set yourself up for flexibility down the track, we’re here to help.
Listen to Episode 23 for the full breakdown or Book a Get to Know You Chat to map out your plan with clarity and confidence.
