Loan to value ratio (LVR) is a measure of how much of a property's purchase price is being financed with a loan. It is calculated by dividing the amount of the loan by the property's purchase price. For example, if a property is worth $500,000 and the loan amount is $300,000, the LVR would be 60%.
LVR is an important factor that lenders consider when assessing a borrower's risk. Lenders typically prefer to lend to borrowers with a lower LVR, as this indicates that the borrower has a greater equity stake in the property. A higher LVR may result in higher interest rates or the requirement for lenders mortgage insurance (LMI).
There are a number of applications of LVR for property investment.
Assess risk: LVR can be used to assess the risk of an investment. A higher LVR indicates that the borrower is more reliant on the property's value increasing in order to repay the loan. This means that there is a greater risk of the borrower defaulting on the loan if the property's value decreases.
Set lending limits: Lenders use LVR to set lending limits. This means that they will only lend a certain amount of money to borrowers with a certain LVR. This is to protect the lender from losses in the event of a borrower defaulting on a loan.
Compare investment opportunities: LVR can be used to compare different
investment opportunities. A lower LVR indicates that the borrower has a greater equity stake in the property, which may make the investment more attractive to some investors.
Make investment decisions: LVR can be used to make investment decisions. For example, an investor may decide to invest in a property with a lower LVR in order to reduce the risk of the investment.