Why Your Loan-to-Value Ratio Changes After You Put 20% Down

Putting 20% down on a home in Australia usually means making a 20% cash deposit and borrowing the remaining 80% of the property’s assessed value. If that value matches the purchase price, the lender’s loan-to-value ratio, or LVR, starts at 80%. Your equity starts at 20%: the difference between the property value and the outstanding loan balance.

That starting point is a snapshot, not a permanent figure. Principal repayments, changes in property value, and a later refinancing can each alter the LVR. Understanding what counts—and what does not—helps you judge whether you remain comfortably above the 80% borrowing threshold, manage Lenders’ Mortgage Insurance, and preserve options for your home loan.

The 80% starting point

Australian buyers generally call the upfront contribution a cash deposit rather than a down payment. The deposit is not the only cash required: buyers in NSW and Victoria may also need to cover stamp duty, conveyancing costs, building inspections and other expenses. Stamp duty is separate from the property value used to calculate the LVR, although eligible first-home buyers in some jurisdictions may receive a duty concession.

At an initial LVR of 80%, the loan is normally below the threshold at which a lender requires Lenders’ Mortgage Insurance, or LMI. Some lenders offer products with different conditions, and capitalised LMI can increase the amount borrowed. Australian lenders also assess whether the household can service the loan, often using a higher interest rate than the advertised rate and allowing room for living expenses.

Buyers who want to understand the documents and questions involved can consult this overview of securing a home mortgage loan before committing to a property.

What actually moves the ratio

The loan-to-value ratio is recalculated by dividing the outstanding principal by the property’s value for lending purposes. Principal repayments reduce the numerator, so a loan that began at 80% LVR will gradually fall below that level as the balance is paid down. Interest does not reduce principal; it only covers the cost of borrowing it.

Property values affect the other part of the calculation. If the home rises in value while the balance remains unchanged, the LVR falls. If values decline, the ratio rises even when the borrower is making regular repayments. This is why a borrower with an 80% starting LVR can move above that threshold after a fall in local property prices.

The direction of each movement matters. Reducing debt generally strengthens the equity position, while a valuation decline can reduce the amount a lender is prepared to lend against the property. These changes are independent of whether the borrower originally paid 20% or another amount.

Why some repayments may not lower it

Offset accounts are common among Australian owner-occupiers because they can reduce the interest charged on a home loan. However, money held in an offset account usually does not count as a principal repayment for LVR purposes. The outstanding loan remains the same, so the formal ratio does not fall merely because a borrower has accumulated savings in an offset facility.

A redraw account works differently from an offset account. Depositing extra money into a redraw facility makes it available for withdrawal but does not necessarily reduce the loan balance. Consequently, borrowers should check whether an extra payment has actually been applied to principal or remains available in redraw. Only the amount genuinely reducing the debt improves the LVR.

Interest-only periods present another potential misunderstanding. During an interest-only period, the borrower may make repayments large enough to cover the interest but without reducing principal. Switching to principal-and-interest repayments, or directing additional cash to the outstanding balance, gives the LVR a clearer path downwards.

Refinancing, values and the 80% threshold

Refinancing creates an opportunity to obtain a new assessment of the property and a new LVR. A valuation-based refinance can produce a lower ratio if the lender accepts a higher property value than the amount originally secured. If the borrower also requests additional cash, however, the larger loan may raise the LVR or take it back above 80%.

Auction markets in Sydney and Melbourne show how purchase prices and lending values can diverge. A successful buyer may pay a premium during a competitive auction, while a lender’s assessment remains based on comparable sales. Paying more does not automatically create more usable equity if the security value is lower, and the buyer may still need to cover the difference from savings.

Once an existing borrower moves above 80% LVR, a new lender may require LMI again. Conversely, a borrower whose ratio falls below 80% can ask the current lender whether LMI can be discharged. The lender will normally need evidence showing the reduced balance or a higher accepted property value.

Using equity without changing the position

Home equity can be useful for renovation, investment or consolidating other debts, but borrowing it against a property does not automatically reduce the LVR of the existing home loan. A line of credit or equity loan adds secured borrowing without lowering the original balance. Lenders may also consider the new liability when assessing future borrowing capacity.

A cash-out refinance is different because the additional funds become part of the new loan. If the property is worth $500,000 and the existing balance is $400,000, adding $50,000 produces a $450,000 loan and a 90% LVR. That borrower would be moving above the usual LMI threshold, while a cash-out equity loan would leave the formal mortgage balance at $400,000.

The following comparisons show how common changes affect borrowing equity:

Scenario	Property value	Loan balance	Resulting LVR	Main implication
20% deposit at purchase	$500,000	$400,000	80.0%	No LMI normally required
$10,000 principal repayment	$500,000	$390,000	78.0%	Equity and borrowing capacity increase
$10,000 placed in offset or redraw	$500,000	$400,000	80.0%	Formal LVR remains unchanged
Property rises by 10%	$550,000	$400,000	72.7%	Lower LVR from stronger security value
Property falls by 10%	$450,000	$400,000	88.9%	LMI may be required on refinancing
$50,000 cash-out refinance	$500,000	$450,000	90.0%	Higher loan and possible LMI costs

The key distinction is between cash held against a home and principal genuinely removed from the mortgage. Only changes to the outstanding balance or accepted property value alter the formal LVR, which remains the central measure used by Australian lenders when assessing equity and insurance requirements.