1

Suppose if I am taking a $50,000 on loan for home or for car or for anything,I have read it many times that LVR is 85% or 80%.what does it mean actually?

Is it applicable for Indian citizens too?

4

LVR is Loan To Value Ratio. If we are buying a property of $100,000 with a loan of $75,000, the LVR is 75%.

It is applicable to India as well. In Indian Context it is typically called Debt Equity Ratio. For most of the bank, if we are buying house of INR25,00,000 an LVR of 75% will be asked by the bank. This means the buyer has to pay 25% from his own sources.

3

The Loan to Value ration (LTV) is a simple calculation.

If you make a 20% down payment , the LTV will start off at 80%. As you make payments the amount you owe will decrease, so even if the value of the house stays the same the LTV will decrease.

If you have 50,000 remaining on the Loan, and the house is worth 62,500, the LTV is 80%. (50000/62500)

The lower the LTV the less likely you are to walk away from the house. In the US an initial LTV of more than 80% requires PMI. Banks will also require LTV to be less than 80% on a cash out refinance.

3

LVR is simply the amount of the loan to the value of the asset you are buying expressed as a percentage (or ratio).

Most banks in Australia require you to have an LVR of 80% or less. If you have a LVR of more than 80% then the bank passes on the costs of the Loan Mortgage Insurance (LMI) to the borrower. In some cases the bank may require a lower LVR. This has been the case previously in Sydney Australia when there was an over supply of inner city appartments built in the 1990s and their values started dropping considerably. The banks saw these properties as a higher risk so reduced the level of LVR to 60%, where the cost of LMI was passed onto borrowers when their LVR was above this 60%.

So if a house costs $100,000 you would need to have a deposit of $20,000 (plus purchasing costs) and borrow $80,000 to have an LVR of 80%. During the life of the loan the LVR will change. It will reduce as the loan amount is reduced and the value of the house increases, but it can also increase if the value of the house drops considerably (as it may during a property crash).

LVR would be applicable with most banks in most countries, but may be called by a different name.

2

LVR is also called the Loan To Value (LTV) ratio. When you start the loan, it's the amount of loan to the value of the property. In India it has to be at most 80% (according to the RBI) and in some cases, it's limited to 75% (higher end housing).

But there are those that work around the limits by inflating the cost (and thus "value" of the house), by adding elements like interior decoration, insurance and appliances. This is objectionable practice but in reality it is used often in collusion with bankers and agents to procure a loan when one is unable to find the down payment.

Largely, the Indian banking system believes that home prices will only go up, so even if you start with a loan that is 90% of the value today, it may only be 70% of the value tomorrow. However, the crash of home prices in the US and the west show that this is not a sound strategy.

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