What is Loan to Value Ratio?

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Loan to Value Ratio, often abbreviated to LVR is quite self-explanatory but might take you a little while to get your head around if you haven’t thought about it before.

Put simply, if you are buying a property worth $1,000,000 and the bank will lend you a maximum of 90% Loan to Value Ratio, then this means they will lend you $900,000 and you will have to put in the remaining $100,000.

LVR is mostly a term used by banks and financial institutions and it helps them manage their own risk.  Just like you manage risk when investing in property, banks must also manage risk when lending money to you (because they like to make a profit I’ve heard!).

Banks will vary the LVR depending on how risky they determine you are as an individual and on how risky they determine the property is as an investment.  For example, it is common for mortgages secured by commercial properties to have a lower LVR meaning that the bank lends you less of the total value and you must put in a higher deposit yourself.

The reason behind this is commercial property is often seen as more risky than residential property due to longer periods of vacancy and more exposure to certain parts of the economy.  If the economy goes bad, people will still need residential homes but will not necessarily be able to keep their businesses running.

The LVR that financial institutions offer to their customers can also vary based on confidence in the lending sector and the overall economic outlook.  During good times, banks may lend up to and over 100% of the value of property.  This was common before the GFC and was a risky move by both the lender and the customer but since then the LVR’s have come back to a more common level.

Understanding LVR will help you determine how much you need to borrow when buying an investment property and therefore, how much the monthly repayments will be.

LVR is a very useful ratio when it comes to successful property investing.

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