What is LVR? The Loan to Value Ratio (LVR) is a crucial financial metric used in the mortgage lending industry.
It is calculated by dividing the loan amount by the value of the property being purchased. The property’s value is determined through a lender’s valuation process, which will consider either the purchase price or the bank’s valuation, whichever is lower.
How is LVR used?
LVR is a tool used by lenders to assess the risk associated with a loan. Most lenders have specific limits on the LVR they are willing to approve.
Generally, many lenders will provide loans to owner-occupiers up to a 90 per cent LVR, with a few extending to 95 per cent LVR.
The LVR plays a significant role in determining the lender’s own credit rating.
The role of LVR in lending decisions
For loans that exceed standard LVR limits, lenders often mitigate their risk by insuring the loan through a Lenders Mortgage Insurance (LMI) policy.
Typically, to avoid the additional cost of mortgage insurance, borrowers need to maintain an LVR of 80 per cent or less.
Calculating LVR
To calculate the LVR, divide the amount you intend to borrow by the property’s value.
For example, if you are borrowing $200,000 and the property is valued at $250,000, the LVR would be 80 per cent.
LVR, risk and interest rates
From a lender’s perspective, a higher LVR represents a higher risk.
As a result, loans with higher LVRs are scrutinised more closely during the approval process and typically come with higher interest rates.
Conversely, a lower LVR indicates lower risk, which can attract more favourable interest rates.
This means that borrowers with a lower LVR are not only more likely to have their loans approved but also stand to benefit from lower borrowing costs over the life of the loan.
This article provides an overview of LVR, its importance in mortgage lending, and how it impacts both borrowers and lenders, particularly in terms of risk assessment and interest rates.
