Is LVR Calculated Before or After LMI?

TL;DR – Key takeaways

• LVR is always calculated before LMI, not after.

• LMI does not reduce your LVR — it is a cost triggered by a higher LVR.

• Some lenders allow LMI to be capitalised into the loan, which can raise the effective LVR. How LMI is treated can affect approval risk, repayment terms, and refinancing options.

• Understanding this distinction helps buyers avoid budget blowouts and false assumptions.

Introduction: A Small Technical Detail That Confuses a Lot of Buyers

"Is LVR before or after LMI?" is one of those questions that sounds technical — but has very real consequences for buyers in NSW.

It often comes up when buyers are:

• stretching to enter the market with a smaller deposit

• comparing loan options across lenders

• surprised by how their borrowing power has been assessed

In the Illawarra, where median prices mean many buyers sit around the 80–90% deposit threshold, misunderstanding how LVR and LMI interact can lead to incorrect assumptions about affordability, approvals, or future refinancing.

Let's clarify it properly, in plain English.

What LVR Actually Is (and When It's Calculated)

LVR is a ratio — not a fee

Loan-to-Value Ratio (LVR) is a simple calculation:

Loan amount ÷ property value

For example:

• Purchase price: $1,000,000

• Loan amount: $900,000

• LVR: 90%

This calculation is done before LMI is even considered.

LVR answers one question only:

How much of the property’s value is being borrowed?

It does not include:

• LMI

• stamp duty

• legal fees

• other purchase costs

Those costs matter for cash flow — but not for the LVR calculation itself.

Where LMI Fits Into the Picture

LVR triggers LMI — it does not change it

Lenders Mortgage Insurance (LMI) is a fee charged when your LVR exceeds a lender's preferred threshold (commonly above 80%).

Crucially:

• LMI is not part of the LVR calculation

• LMI is triggered because of the LVR

So the order is always:

1. LVR is calculated

2. LMI requirement is assessed

3. LMI cost is determined

This is where confusion often starts.

Some buyers assume that once LMI is added, their LVR "drops" or is recalculated. It isn't.

The original LVR remains the same.

Capitalising LMI: Why It Feels Like "After"

The nuance that trips buyers up

In some cases, lenders allow LMI to be capitalised — meaning the LMI premium is added to the loan rather than paid upfront.

For example:

• Loan before LMI: $900,000

• LMI premium: $20,000

• Total loan after capitalising LMI: $920,000

The initial LVR assessment was still based on the $900,000 loan (90%).

However, after the settlement:

• The actual loan balance is higher

• The effective exposure increases

This is why buyers sometimes believe LVR is calculated "after" LMI — but technically, it isn't.

The lender:

• assesses risk on the pre-LMI LVR

• then decides whether LMI can be capitalised

Two different steps.

Why This Matters for Buyers in NSW

Approval risk and lender policy

Different lenders treat capitalised LMI differently.

Some:

• cap how high the post-LMI exposure can go

• apply stricter servicing buffers

• restrict certain property types or locations

In Illawarra markets—especially in apartments, coastal properties, and smaller strata schemes—these policy nuances can materially affect approval outcomes.

Refinancing later

Another common misconception:

“Once I pay LMI, I’ll never think about it again.”

In reality:

• LMI is not refundable. Your ability to refinance later depends on your new LVR, not whether LMI was paid

If prices haven't moved materially and your loan balance remains high due to capitalised LMI, refinancing options may be limited.

Local Insight: What Buyers Often Miss

From experience, buyers commonly misunderstand three things:

1. LMI protects the lender, not the buyer. It doesn't improve your position — it compensates the lender for higher risk.

2. A smaller deposit isn't always "bad" In some Illawarra scenarios, paying LMI to secure a long-term home can be reasonable — but only if the buyer understands the trade-offs.

3. LVR thresholds matter more than exact percentages. Crossing from 80% to 81% can have a bigger impact than moving from 88% to 89%, depending on lender policy.

This is why strategy matters more than rules of thumb.

Quick Reference: LVR vs LMI

LVR

• A ratio

• Calculated first

• Based on loan ÷ property value

• Used to assess lending risk

LMI

• A cost

• Triggered by higher LVR

• May be paid upfront or capitalised

• Does not change the original LVR calculation

Practical Buyer Checklist

Before assuming you understand your position, ask:

• Is my LVR calculated on the purchase price or valuation?

• Will LMI be capitalised or paid upfront?

• How does this affect my actual loan balance after settlement?

• Does the property type affect LMI policy?

• What does this mean for refinancing in 2–5 years?

If these answers aren't clear, neither is your risk profile.

Conclusion: The Sequence Matters More Than the Math

So, is LVR before or after LMI?

Always before.

But the consequences of LMI — especially when capitalised — can feel like it comes after, because it affects your real-world loan balance and flexibility.

Understanding this distinction helps buyers:

• avoid false assumptions

• plan deposits more accurately

• Choose lenders strategically rather than emotionally.

In markets like the Illawarra, where price points push many buyers into LMI territory, clarity here isn't optional — it's foundational.

Your Next Step

If you're buying and unsure how LVR, LMI, and lender policy interact for your specific property or suburb:

• 📘 Download the Illawarra suburb guide

• 📞 Book a free buyer strategy call

• 📩 Or email joel@theshorelineagency.com.au

A clear structure up front makes every subsequent decision easier.

Disclaimer

This article is general information only and does not constitute financial advice. Lending policies vary between institutions, and buyers should seek advice specific to their circumstances.