If we add some figures, it would become easy for us to understand. And the rest you need to give from your own pocket.
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Loan to value ratio is one of the most important risk assessment tools in financial institutions. And before lending the money to the borrowers, lenders examine before approving the mortgage. Normally, the appraised value of the property is the selling price. But still the lenders or the banks will send their appraisal team to value the property. And then they would decide to loan the amount mortgage amount.
But LVR can be more than that and in that case, the interest rates may go higher. One thing we need to understand in LVR is this — higher would be the ratio, more would be the risk. So if the lender gives you higher LVR; that means it has more risk inherent within it.
And the borrower also suffers a lot due to a high LVR even if it seems that borrower is getting the benefit. When the LVR is higher, the cost of the loan increases and as the risk of the lending is much more as the lender is paying more , the interest rate is much higher.
In this section, we will understand Loan to Value Ratio in detail. So what would be the conclusion after computing the LVR of both of these banks? Here is the conclusion —. That means the risk inherent within the loan amount would be lesser and thus, the interest rate would be lower as well. It will help the borrower.
In this example, we have not been given the mortgage amount; rather we have the information for down payment. So how would we compute the mortgage amount? Now the bank has to decide whether PMI is required for this or not. Cash flow and liquidity ratios let you assess the amount of working capital you have in your business, and how solvent the business is in the short to medium term.
The working capital ratio is also known as the 'current ratio', and is one of the best known measures of financial strength. It shows how much money you have available to meet creditors' demands. You can use this ratio to establish whether your business has enough current assets to pay its current debts, with a margin of safety for unforeseen losses, such as reduced stock levels or hard-to-collect debts.
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Use the following interactive calculator to help you work out your working capital ratio. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your working capital ratio. The higher the working capital ratio, the better. A ratio of 2 or higher, indicating you have twice as many assets as liabilities, suggests your business is in good shape. A working capital ratio of less than 1 indicates your business may be in trouble.
Also known as the liquidity ratio, this measures the solvency of your business, or your ability to meet its immediate commitments. When calculating this ratio, it is important only to include current assets that are in cash or can be readily converted into cash. Only include current liabilities that may need to be met quickly.
You should aim for a ratio of or higher. If the majority of your current assets are with debtors, and there is a pattern of debtors paying late, your quick assets ratio will need to be higher.
In this case, what we would take into account while computing the loan to value ratio? We need to take into account the one which is lesser of the purchase price or the appraised value of property. In this case, both purchase price and appraised value of property are same. So we would take the same value. This is a different example because you can notice a difference between appraised value of property and the purchase price.
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To get a mortgage amount, we will always deduct the down payment from the purchase price, not the appraised value of property. Now, as the purchase price is lesser than appraised value of property, we would take purchase price into consideration while computing loan to value ratio. Now there are cases where one person takes two loans to reduce the LVR and so that he needs to incur lesser costs. In that case, we need to compute Combined LVR. Now this LVR is much lower. In this section, we will look at the loan to value ratio of two almost similar industries.
We are taking the example of two almost similar industries so that we can understand the value of loan to value ratio and how drastically different they both are.
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Now the question is why so? Why loan to value ratio for used car loans is higher than the loan to value ratio for new car loans? There may be two particular reasons for that —. LVR is very useful in terms of lending the money to the borrowers.
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But there are few things you need to keep in mind. This is applicable if the LVR is high. Loan to value ratio is very useful for both lenders and borrowers. Your email address will not be published.