Loan to Value Ratio
In determining the riskiness of a loan, lenders often look to ratios and other calculations to guide decisions. Each loan is in itself a small project with its own unique conditions, limitations, and variables that make mortgage loans especially a process involving many complex factors. Two major factors underlying this process are the principal value of the debt and the total value of the underlying asset. To speak more plainly, the two main factors are the amount of the mortgage at the time of the loan and the value of the property purchased with the mortgage. The Loan to Value Ratio (abbreviated LVR) is simply the division of the mortgage amount (numerator) by the property value (denominator) and can be express as:
LVR = Mortgage Amount / Property Value
It is essentially the mortgage amount as a percentage of the property value purchased with the mortgage. Say, for example, that a person wants to take out a $100,000 mortgage to buy a house and the land on which the house sits. The official appraised value of the house is $150,000. Then, the LVR can be calculated as:
0.6667 = 100,000 / 150,000
The mortgage amount expressed as a percentage of the property value is about 67%. Were the value of the property appraised at $120,000, the LVR would be:
0.8 = 120,000 / 150,000
and we could say that the mortgage amount expressed as a percentage of the property value is 80%.