Loan-to-value ratio (LVR) is a tool used to evaluate the risk in a collateralized loan, usually a mortgage loan. The ratio is equal to the mortgage amount divided by the property’s appraised value. Often, the appraised value is the same as the selling price, but the bank will usually require an official appraisal anyway.Janet wants to purchase a house. Her lender sets a maximum LVR of 80%. If Janet signs a sales contract to purchase a house for $200,000, then Janet’s maximum mortgage loan is $160,000. The remaining $40,000 must come from Janet herself. Typically, the higher the loan-to-value ratio, the riskier the mortgage. This added risk increases the loan costs for the borrower via higher interest rates. In addition, the borrower will be asked to purchase mortgage insurance. Note, the LVR is just one of many tools lenders use to assess the risk inherent in a mortgage. In the United States, the vast majority of mortgages have LVRs of 80% or below. There are options for financing the purchase of a home with a loan that has a higher LVR, but those loans have higher interest rates. When a home’s value declines below the mortgage balance, the LVR will be greater than 100%. Those mortgages are referred to as underwater or upside-down.