LVR and LMI explained: why 80% matters

Your loan-to-value ratio (LVR) is one of the first numbers a lender looks at. It shapes the rate you're offered and decides whether you pay Lenders Mortgage Insurance (LMI).

How LVR is worked out

LVR is the loan amount divided by the lender's valuation of the property. Borrow $560,000 against a home valued at $700,000 and your LVR is 80%. Note that it's the lender's valuation that counts, which can come in below the price you paid.

Why 80% is the line

• Above 80% LVR, most lenders require Lenders Mortgage Insurance.
• LMI protects the lender, not you, if the loan goes bad and the property sells for less than is owed.
• It's usually a one-off premium that rises steeply as the LVR and loan size increase, and it can often be added to the loan.
• Lower LVRs also tend to unlock sharper interest rates, so the benefit doesn't stop at 80%.

Ways to avoid or reduce LMI

• Save a little more deposit to get under 80%, or close enough that the premium drops sharply.
• Eligible first home buyers can use the Australian Government 5% Deposit Scheme, which removes LMI on qualifying loans.
• A family guarantee lets a parent's property secure part of the loan.
• Some lenders waive LMI for certain professions or above set incomes.

LVR when you refinance

LVR matters on a refinance too. If your property has grown in value or you've paid the loan down, you may now sit under 80% and qualify for a better rate. If you're above 80%, a new lender may charge LMI again, which can wipe out the saving.