Wednesday, February 23, 2005

Loan to Valuation Ratio (LVR)

Loan to Valuation Ratio

The Loan to Valuation Ratio or LVR is an important criteria used by lenders to evaluate your suitability to borrow.

It is a formula they have devised based on experience of loan defaults that attempts to minimise risk from borrowers defaulting.

The LVR is expressed as a percentage and calculated by taking the amount of the loan, dividing it by the value of the property (see warning below), and then multiplying it by 100.

In this example of a $225,000 loan on a $283,000 property the LVR is 79.5% meaning that no mortgage insurance is required. 225/283=.795x100=79.5%LVR

Lets look at another example of a $225,000 loan, but this time on a $250,000 property where the 80% cutoff is exceeded by 10% requiring insurance. 225/250=.9x100=90%LVR

Be aware that the value of the property is determined by the lenders valuer and is NOT the purchase price. You could be in for a nasty surprise at settlement if you haven't taken this into account. There may be the difference between the valuer's price and the purchase price that you have to cover yourself.

We suggest you contact a Mortgage Broker for advice on finance and mortgage insurance. They have access to a much greater range of products and lenders than banks so you should be able to get something to suit your situation.