Loan-to-value Ratio (LVR) is a measure of the amount of debt a borrower has relative to the value of the asset they are borrowing against. In securitisation transactions, the LVR of the underlying loans is an important factor in determining the risk of the securitisation.
The LVR is calculated by dividing the amount of the loan by the value of the asset. For example, if a borrower borrows $500,000 to buy a house that is worth $1 million, the LVR is 50%.
A higher LVR means that the borrower has a greater amount of debt relative to the value of the asset. This means that the borrower is more likely to default on the loan if the value of the asset falls.
In securitisation transactions, the LVR of the underlying loans is an important factor in determining the risk of the securitisation. If the LVRs are too high, the securitisation is considered to be more risky. This is because there is a greater chance that the borrowers will default on their loans, which could lead to losses for the investors.
The applications of LVR in securitisation include:
- To determine the risk of the securitisation: The LVR is an important factor in determining the risk of the securitisation. If the LVRs are too high, the securitisation is considered to be more risky.
- To set the interest rates on the securities: The interest rates on the securities issued in a securitisation are typically set based on the LVRs of the underlying loans.
- To provide collateral: The underlying loans may be used as collateral for the securities issued in a securitisation. This means that if the borrowers default on their loans, the investors will be able to seize the assets that were used as collateral.
LVR can be a valuable tool for securitisation transactions. It can help to determine the risk of the securitisation, set the interest rates on the securities, and provide collateral for the securities.