Good Loan-to-Value Ratio (LVR)

The loan-to-value ratio (LVR) is a significant factor that lenders carefully assess when reviewing mortgage applications. It plays a crucial role in determining the level of risk associated with the loan and can impact the interest rate offered to borrowers. Higher LVRs indicate a higher level of risk, often resulting in higher interest rates. In certain cases, borrowers with high LVRs may be required to obtain lender mortgage insurance (LMI) to help mitigate the lender's risk.

To calculate the LVR, divide the mortgage amount by the appraised value of the property. This calculation provides a percentage that represents the proportion of the property's value that is financed through the loan.

The LVR is an important consideration in mortgage underwriting for various purposes, including home purchases, refinancing, and borrowing against property equity. Lenders use the LVR to evaluate the risk involved in approving a loan. Higher LVRs indicate a greater likelihood of default because there is less equity in the property. This poses challenges for lenders when it comes to recovering their investment in the event of foreclosure, as the proceeds from selling the home may not be sufficient to cover the outstanding mortgage balance.

Lenders carefully evaluate the LVR when reviewing mortgage applications, home equity loans, or lines of credit. A lower LVR increases the likelihood of loan approval and allows borrowers to secure more favorable interest rates. If the LVR exceeds 80%, borrowers may be required to obtain lender mortgage insurance (LMI), which adds to the overall cost of the loan. Over time, as borrowers make mortgage payments and the value of the property appreciates, the LVR decreases. While most lenders adhere to the 80% LVR requirement, there may be exceptions for borrowers with high income, low debt, or significant investment portfolios.

Most lenders consider an LVR of 80% or below to be favorable. For instance, if the LVR is 70% (0.70), it means that the amount borrowed is equal to 70% of the property's value. In a mortgage scenario, a property valued at $500,000 with a 70% LVR would require a $150,000 down payment, with the remaining $350,000 financed through a mortgage.

Source: https://www.investopedia.com/terms/l/loantovalue.asp