You would have more than likely heard the term LVR if you have spoken to a finance professional about your home loan options.

LVR or Loan to Value Ratio is the percentage that the bank will lend against the value of your property. For example, if your home is worth $1m, and you borrow $500,000 against that property, your LVR would be 50%.

This is why lenders will carry out an independent valuation on your property to determine the value, which will then determine the LVR.

Ideally, the less the lender lends you against your property, the lower the risk you are to the lender. If the lender lends you 95%, then you are a very high risk to the lender. Your LVR determines your interest rate, the lower the LVR, the better the rates the banks offer.

The sweet spot for most lenders is 80%, which means you are contributing 20% of your money, which gives the lender comfort and low risk. This will also give you access to the best rates on offer.

When borrowing more than 80% of the value of the property, you will need to pay Lenders Mortgage Insurance. Lender Mortgage insurance protects the lender if you default on your loan, and they cannot recover their loan balance with the sale of your property. That is why, when you contribute 20% of your funds, it is less likely that the value of your property will reduce more than 20% in value over the lifetime of your home loan.