The loan-to-value ratio is the percentage of the value of a property that is covered by a mortgage. The calculation is also applied to loans secured on other items like boats and cars. Lenders will declare what LVR they will allow on a loan, so you need to calculate how much you can pay towards the purchase to work out whether that lender’s limit will enable you to buy.
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Get the price you intend to pay for the property agreed by the seller. This may not be the price the seller originally sought. In rising property markets buyers sometimes compete for a property, so the selling price ends up being higher than the asking price. In slow or falling markets, the seller may accept a lower offer than the asking price.
Work out how much money you have. You should deduct expected solicitors fees and taxes. This will leave you with the amount you have to contribute to the purchase.
Deduct your available funds from the offer price. This will leave you with the amount you need to raise in a mortgage.
Divide the mortgage amount by the offer price and multiply the result by 100. This will give you the mortgage expressed as a percentage of the offer price. This is your loan-to-value ratio.
Tips and warnings
- The lower your LVR the better interest rate you will get on your mortgage. Some lenders may require you to take out extra insurance if your LVR is higher than 80 percent.
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