When it comes to purchasing property in Australia, the loan to value ratio (LVR) is an important factor that has to be considered. The LVR is a measurement of how much a finance lender is willing to lend you against the purchase price of a property, and it is used as a tool for determining risk. In other words, the higher your LVR is, the more risky your loan application looks from the lender’s perspective.
Generally speaking, lenders in Australia will not approve loans unless they are comfortable with the risk involved—which means that those with higher LVRs may need additional security or mitigation measures before their applications can be approved. So what exactly determines someone’s LVR? The most basic LVR calculation derives its value from subtracting the total loan amount from the market value of the property. For instance, if you were looking at buying a property valued at $500,000 and had secured a loan of $400,000 then your LVR would be 20%.
The other key component which factors into calculating an individual’s LVR is their deposit amount; this affects the final outcome because it lowers the perceived risk to lenders when there is less money being borrowed against the asset. For example, if your deposit was 10% ($50,000) then your LVR would drop from 20% down to 15%.
In addition to these two components, lenders do take into account other mitigating circumstances, such as income level and personal financial behaviour, when assessing an application for credit—these can also have an impact on whether or not someone’s loan request gets approved.
Overall, understanding how loan-to-value ratios work in Australia can help potential buyers make better decisions about their purchases while also reducing their chances of being declined by banks due to excessive borrowing. By familiarizing yourself with this concept before submitting any applications, as it may even result in better terms being offered in some cases!
