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Loan To value Ratio

What is Loan to Value Ratio?

The loan-to-value ratio, also known as LTV Ratio and LVR, is a lending risk assessment ratio that commercial lenders and other financial institutions examine before approving a credit for buying a property.  Loan to value ratio is one of the key risk factors which is used to convey the ratio of a loan to the value of the property.  

Why LTV Ratio is important?

When lenders provide a loan to the borrower they 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. 

Lenders will decide the maximum LVR allowable depending on the size, location and the nature of the property. For instance, most lenders will look at 100% LVR on properties which are located in major cities, but may only go to 80% LVR for small town or under construction properties.
The lender’s decision is also depending on market conditions and resale potential of the properties. Lenders know future capital gains promise to bring the LVR back so they are more comfortable with higher LVRs in a growing market.

How to calculate LTV Ratio?

To know the LTV ratio for your first home loan or existing loan, you may follow some easy steps to calculate it:
  • Assume the purchase price of the property is $100000.
  • Now deduct the amount of your down payment (for example $10000).
  • In this case, your loan amount will be $90,000.
  • Now divide the loan amount ($90000) by the purchase price ($100000), which equals 90 percent. 
  • This is your LTV Ratio.
  • You would say to the lender that you want a loan with 90% Loan-to-Value or LTV.

Want to know the LTV Ratio Of your Existing Loan? 

  • To calculate LTV Ratio for your existing loan, re-evaluate your property as this is the only way to get an exact estimation of its value. 
  • Now look at the balance amount of your loan. 
  • Divide the loan amount by the value figure. The value you get by this equation is your LTV ratio.

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