Why LVR Alone Won't Tell You If a Property Is a Good Deal

LVR is the number everyone reaches for first. It is easy to calculate, your lender cares about it, and it fits neatly into a spreadsheet cell. But LVR tells you about the loan, not the deal. A property at 60% LVR can bleed you dry, and a property at 88% LVR can be the best decision you make this year. Here is why the ratio on its own is close to useless for judging value, and what you should be looking at alongside it.

LVR is a snapshot of leverage, not a measure of return

At its core, LVR answers one question: how much of the asset is funded by debt versus equity. That is a solvency and risk metric. It says nothing about whether the rent covers the mortgage, whether the asset is appreciating, or whether you are buying at a fair price.

Consider two properties, both purchased at $800,000.

• Property A: $480,000 loan, 60% LVR. Regional town, gross yield 4.1%, weak population growth, 45 days average time on market.
• Property B: $704,000 loan, 88% LVR. Inner-ring suburb, gross yield 3.4% but with a granny flat approval pending that lifts effective yield to 5.2%, and comparable sales running 6% ahead of your purchase price.

LVR says Property A is the “safer” buy. The full picture says Property B has more equity upside on day one and a clearer path to positive cash flow. The ratio pointed you at the wrong asset.

DSCR is the number LVR is hiding from you

If you only track one ratio alongside LVR, make it debt service coverage. DSCR tells you whether the property’s income actually services its debt.

Take Property B above at 88% LVR. On a $704,000 interest-only loan at 6.5%, that is roughly $45,760 in annual interest. If gross rent is $27,200 (3.4% on $800k) and operating costs run $6,000, net operating income is around $21,200. That gives a DSCR of about 0.46. The property covers less than half its debt cost from rent. You are funding the rest out of pocket.

Now the granny flat completes and rent rises to $41,600. NOI climbs to roughly $34,600, and DSCR moves to about 0.76. Still under 1.0, but the trajectory matters. LVR never moved through any of this. DSCR told the whole story.

Yield without a holding-period view is a trap

A 6% gross yield looks strong until you model it across the years you actually intend to hold. Strata increases, land tax thresholds crossing over, an interest-only period converting to principal and interest, a rate reset: each of these can turn a positive-geared property negative by year three.

In Australia, watch the interaction between land tax and negative gearing carefully. A property that negatively gears well while rates are high can flip to positive cash flow after a refinance, at which point your deductible losses shrink. In the UK, Section 24 means mortgage interest is no longer fully deductible against rental income for individual landlords, so a headline yield calculated pre-tax can be badly misleading if you hold personally rather than through a company. In New Zealand, interest deductibility rules have moved more than once in recent years, so any forecast needs to reflect the regime that applies for your holding period, not last year’s.

What to model before you commit

Before an acquisition, run the numbers across the full holding period, not just settlement day:

• Net yield after all costs, not gross
• DSCR at current rates and at a +2% stress rate
• Equity position over 5 and 10 years under conservative and central growth assumptions
• Cash flow after tax, correct for your ownership structure, whether that is personal, trust, SMSF, or an SPV
• The point where interest-only converts and what that does to monthly outgoings

This is exactly the kind of pre-purchase scenario modelling that changes decisions. Seeing that Property B sits at a 0.46 DSCR today but reaches breakeven in year two, while Property A never clears 0.9, is the difference between buying on a ratio and buying on evidence.

LVR earns its place in your dashboard. It just should never sit there alone.

Track your own portfolio free → prop-insights.app