What is an 'LVR'? Investment terms explained

No doubt you're aware that when it comes to obtaning a mortgage on your property, you need to be aware of a little acronym called an 'LVR'. This isn't as complicated as the letters may suggest and, in fact, stands for loan to value ratio.

Essentially, what is what it means:

However much money your bringing into the property as a deposit is the 'value' that you're pouring into the purchase. The 'loan' aspect is how much the bank then provides to you, to bring the total of both up to 100% of the purchase price.

In practice, if you're borrowing $500,000 for a property and you have $50,000 as a deposit, you also have other funds for the other costs to get into the home, such as inspections. If you're not sure what these hidden costs are, then have a look at this quick guide.

Take your deposit from the total amount of the property and you have the mortgage that you will need.

In this case, you need $450,000.

Your deposit, $50,000, works out to be 10% of the price of the property. This means that you are looking for a loan of 90%.

This 90% is your LVR.

You may sometimes see this referred to as an LTV, or 'loan To value'.

This is an important number as it determines how risky you are to the bank - who are less inclined to lend to you if you are asking for a higher LVR. Those borrowing over 80% are deemed to be in the higher risk category. It also determines whether you pay lenders mortgage insurance, or LMI.

The more you put into the property, the less interest you will also be required to pay, and the LVR will help you determine the minimum deposit you will be able to put into the property.

The LVR also becomes important if you're looking to refinance. You will be required to leave some value in your property, and any over this can potentially be equity for future purchases, renovations or for other uses.