“A mortgage loan with a higher Loan-to-Value ratio (LVR) carries higher credit risk.” Define LVR, give...

“A mortgage loan with a higher Loan-to-Value ratio (LVR) carries higher credit risk.”

Define LVR, give a specific example of LVR, and explain this statement in about 200 words.

Expert Solution

Loan to value ratio= (total mortgage amount / total appraised value of the property)

Loan to value ratio is the amount you are borrowing to the value of the property you wish to buy, so it is expressed as a percentage and lender will be commonly using the loan to value ratio to assess the risk of the home loan and when there will be a higher loan to value ratio it will represent a higher level of risk to the lender and it can affect your borrowing power and home loan application as well.

when loan to value ratio will be exceeding 80%, it will mean that it is higher and it is risky for the lender because the lender will be requiring lender mortgage insurance and a guarantee to accept that risk as higher loan to value ratio will be indicating high level of lending risks, and the rational behind that is the purchase of property in the mortgage is used as collateral and loan to value ratio is essentially compared the size of the loan requested to the size of the pledged collateral.

Due to the above mentioned reason, the assessment of loan to value ratio will be serving as a crucial role in the mortgage underwriting and when the loan to ratio will be exceeding 80% it will mean that risk on the part of the lender is higher.

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