Loan to Value Ratio: Securing the best loan for your circumstances

By the resi financial blog team, 03 October 2013

What is a loan to value ration LVR

Regardless of whether you're an investor or a first home buyer, taking out a mortgage for your real estate endeavours is a natural part of the process.

No doubt you'll be working towards saving up a deposit towards your home loan, while hoping to secure the remainder of the property's value through a lender. The basic principle that lenders operate on is known as the Loan to Value Ratio (LVR).

Understanding LVR is an essential part of achieving property success. Simply put, LVR is the amount of money you borrow from a lender compared to the overall value of the property.

LVR is measured as a percentage of the value, which is used to evaluate the lender's risk associated with the loan - naturally, the lower the LVR, the lower the risk for the lender to take on the loan in the long run. This could make it more likely for the mortgage lender to approve your application.

In Australia, any LVR over 80 per cent is subject to taking out Lenders Mortgage Insurance (LMI).

Because of the large amount of risk involved with lending over 80 per cent of the property’s value, this insurance is there to protect the lender in the circumstance that the borrower defaults and is unable to pay them back.

However, this also increases the overall amount of the loan, so careful consideration should be taken before committing to a loan with an LVR over 80 per cent. Therefore it could be worth taking the extra time to save up a larger deposit in order to put yourself in a better financial position before approaching a mortgage lender.

Categories: Property Investment