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What is a loan-to-value ratio?

What is a loan-to-value ratio?

The loan-to-value ratio is the percentage amount of the value of a property that a financial institution will allow you to borrow for home loans. The higher the loan-to-value ratio the less deposit is required. Loan-to-value ratio is also commonly referred to as LVR and is used to access the risk for the lender.

An example of this is a loan-to-value ratio of 87 percent means that the borrower will need to outlay at least 13 percent of the total value of the property, in order to be approved for this home loan.

An LVR of 80% or below is considered to be low risk for standard conforming loans while an LVR over 80-90% are considered a very high risk and most likely will require the borrower to take out lenders mortgage insurance (LMI). 

Home loans with an LVR over 90% have higher repayments and loan terms, which is why they are required to take out LMI, as opposed to borrowers who have a 20% deposit.

Every financial institution will offer loans with different loan-to-value ratios so it pays to compare home loans and calculate your monthly repayments

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