Loan-to-value ratio is the single number that shapes almost every part of an investment loan, from the rate you pay to whether lenders mortgage insurance applies and how much equity you can release for the next purchase. With national home values now 5.2% below their March peak, many investors are finding their LVR has moved without them borrowing another dollar. Understanding how lenders use it on investment loans makes it easier to plan the next step.
What LVR Means
LVR is the loan amount divided by the lender’s valuation of the property, expressed as a percentage. A $600,000 loan on a property valued at $800,000 has an LVR of 75%. The lower the LVR, the more equity sits between the loan and the property’s value, and the less risk the lender carries.
For investors with more than one property, lenders may also look at the combined LVR across the whole portfolio, particularly when properties are held with the same lender.
How Lenders Treat LVR Differently for Investors
Lenders tend to be more conservative with investment lending. Some cap the maximum LVR for investment purchases lower than for owner-occupiers, and many reserve their sharpest investor rates for loans at 80% LVR or below, with higher pricing tiers above that. Pricing breaks commonly sit at 60%, 70%, 80% and 90% LVR, and the lowest rates are usually reserved for loans at 60% or 70% and below, so even a modest reduction in LVR can move a loan into a cheaper band.
Lenders mortgage insurance usually applies above 80% LVR, and premiums on investment loans can be higher than for an equivalent owner-occupied loan. If the premium is added to the loan, it also lifts the LVR, which can push the loan into a higher pricing tier. Interest-only repayments can be harder to secure at higher LVRs, as some lenders limit interest-only terms to loans at or below 80%.
Property Type and Location Can Lower Your Maximum LVR
The maximum LVR also depends on the property itself. Many lenders apply tighter limits to certain property types, such as small apartments below a minimum floor area, units in high-density developments, or properties in postcodes they consider higher risk. Some regional locations also attract lower LVR limits.
These restrictions can mean a larger deposit is needed for one property than another at the same price, which is worth checking before committing to a purchase.
How Usable Equity Is Calculated
Many investors fund their next deposit with equity from a property they already own. Lenders usually calculate usable equity as up to 80% of the property’s value, minus the existing loan, to avoid lenders mortgage insurance.
Take a property valued at $900,000 with a $500,000 loan. At 80% LVR, the maximum lending against it is $720,000, so usable equity is about $220,000. If the property’s value falls 5.2% to around $853,000, the 80% limit drops to about $682,000 and usable equity shrinks to roughly $182,000. That is $38,000 less available for a deposit from the same property.
Do Falling Values Affect an Existing Investment Loan?
Not directly. A lender does not usually revalue an existing loan or ask for repayments to change because values fall. The effect shows up when you want to refinance, release equity or buy again, because those all require a new valuation.
LVR and Serviceability Are Separate Tests
A low LVR does not guarantee approval. Lenders also assess whether your income can service all your loans at a buffered rate, counting only part of your rental income. Investors with plenty of equity can still be limited by serviceability, particularly after this year’s rate rises lifted assessment rates.
The reverse also applies. Strong income does not help if the valuation is too low to support the loan amount at the lender’s maximum LVR. Both tests need to work for a loan to be approved.
Structuring Equity Releases
When equity from one property is used for another, the structure matters. Using a separate loan split for the deposit keeps the purpose of each loan clear, which can help with tax record-keeping. A registered tax agent or accountant is best placed to advise on deductibility.
It also helps to avoid linking properties as shared security unless there is a clear reason to. Standalone loans keep each property’s LVR independent, so a fall in one property’s value does not restrict what you can do with the other.
Key Takeaways
- LVR is the loan amount divided by the lender’s valuation, and it affects pricing, LMI and how much equity you can release.
- Many lenders reserve their best investor rates for loans at 80% LVR or below, and LMI usually applies above 80%.
- Property type and location can lower the maximum LVR a lender will offer on an investment purchase.
- Usable equity is commonly calculated as 80% of the property’s value minus the existing loan.
- A 5.2% fall in value on a $900,000 property reduces usable equity by about $38,000.
- LVR and serviceability are separate tests, and both need to work for an investment loan to be approved.