Why is Loan to Valuation Ratio important?

by Chris Lang on June 8, 2012

Mortgage

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

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

The Loan to Value Ratio 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 = 0.795 x 100 = 79.5% LVR.

Take another example of a $225,000 loan, but this time on a $250,000 property where the 80% cut off is exceeded by 10% requiring insurance:
225 / 250 = 0.9 x 100 = 90% LVR

Be aware that the value of the property is determined by the Bank or Lenders registered 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.

As we know mortgages can be quite complicated – if in doubt, use the services of a qualified 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.

This article was kindly contributed by Mrs. Mortgage – Jennifer Schelbert. Jennifer is a director of Mrs. Mortgage Pty Ltd, a licensee for Choice Aggregation Services, and a full member of the Mortgage Finance Association of Australia & COSL.

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