What is LVR and How Do I Calculate It?

Understanding Loan-to-Value Ratios: How It Affects You as a Borrower and the Bank's Risk Management

In today's video, we will be discussing loan-to-value ratios and dive deeper into what LVR is and why it is important for both borrowers and banks.

What is Loan-to-Value Ratio (LVR)?

LVR is a simple calculation that banks use to understand the level of risk a borrower has. It is a way to understand how much debt is associated with a property value. For example, if you have a million-dollar property and an $800,000 loan, your LVR is 80%. If you have a million-dollar property and a $200,000 loan, your LVR is 20%.

Why is LVR important for banks?

The most important factor for a bank in earning money is you paying your mortgage every day. However, the biggest risk to a bank is the explosion in the property market and equity values decreasing. If for some reason you couldn't pay your mortgage, the bank would have to put your property on the market and sell it. The higher your LVR, the greater the risk for the bank, and the more pressure they will put on your application and assessment.

How does LVR affect borrowers?

As a borrower, you might not think of LVR as much going on your day-to-day life. However, LVR is an important metric to maintain and monitor because it is your safeguard. If anything happens to your life, having property assets with a low LVR allows you to sell that property and move on with life or solve problems.

Building Equity and Decreasing LVR

Building equity is the same thing as decreasing your LVR. It is essential to be mindful of your LVR because the more you save and decrease your debt over time, the better your equity position is. This widens the gap between your equity bills and your LVR decreases. One day, when you retire, you will have assets with a lot of equity to retire, pay off, or pass on to your kids.

‍

Understanding LVR is crucial to both borrowers and banks. Different banks price differently at different LVRs, so it is essential to think about your savings journey and why you save more. The more you save, the better your equity position is, and the safer your family and household are. Always remember that LVR is a way to manage risk for both the bank and the borrower.