(Loan to Value ratio) LVR and its impact on the interest rate

08 May 2023

Loan-to-value ratio (LVR) is a measure of the amount of a loan compared to the value of the property that it is being used to purchase or refinance. It is calculated by dividing the loan amount by the value of the property. For example, if you are borrowing $500,000 against a property valued at $600,000, the LVR would be 80% (500,000 / 600,000).

Banks use LVR as a way to assess the risk of the loan and it can have a big impact on the interest rate offered by the bank. Generally, the higher the LVR, the higher the risk to the lender and the higher the interest rate they will charge to compensate for that risk.

If you have a high LVR, it means you are borrowing a large proportion of the value of the property, and the bank will see you as a higher risk borrower. This can make it harder to negotiate a good interest rate with the bank.

On the other hand, if you have a lower LVR, it means you are borrowing a smaller proportion of the value of the property, and the bank will see you as a lower risk borrower. This can make it easier to negotiate a better interest rate with the bank.

It’s important to keep in mind that LVR is just one of many factors that a lender will consider when assessing your loan application. Other factors, such as your credit history, income, and employment status, will also be taken into account.

By saving a bigger deposit, you can lower the LVR and may increase your chances of getting a lower interest rate. It’s always a good idea to have a strong financial position and to do your research on the best interest rate offers before approaching a bank