Why is Loan to Value Ratio (LVR) Important?
When lenders provide you with a home loan they take a mortgage over your property as security for the loan. The value of the security should at least cover the loan principal advanced under the loan.
Let's say the value of the property is $500,000 and the loan amount is $400,000. Divide the loan amount by the property value - $400,000 divided by $500,000 = 80%. This is the loan to value ratio (LVR).
Lenders will decide the maximum LVR allowable depending on the size, location and nature of the property. For example, most lenders will look at 100% LVR on completed properties in major cities, but may only go to 80% LVR on properties under construction, or less on a property in a small town.
Lenders will also limit the LVR in certain areas depending on market conditions and how they see the resale potential of properties in that area. In a rising property market lenders are generally more comfortable with higher LVRs as future capital gains promise to bring the LVR back to, say, 80% within a reasonably short time.
LVRs are generally lower for residential rental properties as they're more likely to be sold ahead of the family home when there is a downward market correction in prices. Consequently the risk of borrower default for these types of loans is perceived to be higher and lenders require more ‘headroom' to manage that risk.
