Loan to Value Ratio

Most property investors focus on interest rates and loan features. But there is another factor that has a far bigger impact on long-term outcomes: your loan-to-value ratio, or LVR.

LVR measures how much of your property’s value is funded by debt. For example, if your property is worth $800,000 and your loan is $640,000, your LVR is 80 per cent.

From a lender’s perspective, LVR is about risk. The higher your LVR is, the less equity you hold and the more exposed both you and the lender become. That is why once you move above 80 per cent, borrowing tends to become more expensive and restrictive. You may face lenders mortgage insurance, higher interest rates and fewer loan options.

High vs low LVRs

Having a higher LVR on your investment property can put pressure on cash flow, especially during vacant periods or when interest rates increase. It can also limit your ability to access equity for your next purchase, even if your property has grown in value. 

On the other hand, lower LVRs tend to give you more flexibility to refinance, sell or expand your portfolio when opportunities arise.

Another detail many investors overlook is that LVR is based on lender valuations, not what you believe your property is worth (or even what a real estate agent has assured you it is worth). If a valuation comes in lower than expected, your LVR can increase, which can affect approvals or require additional funds.

Very generally speaking, the less money you owe on your property, the better. This is why you should always stay up to date with your loan repayments, explore the possibility of an offset account to minimise the life of your loan and find ways to add value to the property so the gap between what you owe and what it is worth is as wide as possible. 

However, you may have a short-term strategy that isn’t affected by a high LVR. If that’s the case and you have a clear plan in place, it’s not something to worry excessively about. 

LVR is a good indicator of how resilient your investment position really is. If you would like some insights about your current LVR, your property manager is a great port of call.