Loan to value ratio (LVR or LTV) is the finance or banking term used to describe the ratio between a loan (or mortgage) and the asset being held as security against that loan.
The loan to value ratio formula is as follows:
$(Loan amount)/$(Value of property) = % Loan to Value Ratio
A Loan to Value Ratio is calculated by dividing the amount of the home loan by the value of the property being used as security.
For example if the property being purchased is valued at $100,000 and your loan is or will be $75,000, then your LVR is 75%.
($75,000)/($100,000) = 0.75 or 75% LVR
The loan to value ratio is important when applying for a mortgage. The lower the LVR, the less risk it is to the bank. Most banks will require Lenders Mortgage Insurance (LMI) where the LVR is greater than 80%, for example, the value of the property is $1,000,000 and you want to borrow more than $800,000. Lenders Mortgage Insurance can cost you thousands of dollars and is more expensive the higher your LVR and the higher the total amount borrowed.
Banks have strict policies about LVRs and will not lend above a certain LVR for a certain borrower profile (e.g. full doc vs low doc) and security type (property type). People in some professions may also be able to get the lender mortgage insurance waived by some lenders, which can save them thousands of dollars. The lower the Loan to Value Ratio generally the lower the interest rate (down to about 70% LVR). Currently the maximum LVR that any lender is offering is 97% when the Lenders Mortgage Insurance is also borrowed and added into the loan.
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