loan to value ratio (LVR)

The Loan-to-Value ratio (LVR) is a financial metric used by lenders to assess the risk of a loan by comparing the amount of the loan to the value of the asset securing the loan. In real estate, the LVR is commonly used to evaluate mortgage loans. It is calculated by dividing the loan amount by the value of the property and is typically expressed as a percentage.

For example, if a borrower takes out a mortgage for $800,000 to purchase a home valued at $1,000,000, the Loan-to-Value ratio would be calculated as follows:

LVR = Loan Value / Property Value = $800,000 / $1,000,000 = 80%

The resulting LVR in this example would be 80%.

Lenders use the LVR as a risk assessment tool because it helps them determine the borrower's equity in the property and the level of risk associated with the loan.

Generally, lower LVRs indicate less risk for the lender, as the borrower has more equity in the property. Lenders typically impose maximum LVRs as part of their lending criteria, with lower ratios often resulting in more favorable loan terms and interest rates.