We wanted to provide some information on a term we are asked about quite frequently by clients, friends, and family: loan-to-value ratio (LTV). 

At face value, LTV can seem like a complicated subject, but it’s actually quite simple once you dig a bit deeper. 

We encourage you to review this information and file it away for further reference when you or someone in your network begins the mortgage process.

What is loan-to-value (LTV) ratio?

Loan-to-value (LTV) ratio is a measure used by lenders to assess the risk of a mortgage loan. Higher LTV ratios indicate greater risk, which may lead to higher interest rates if the loan is approved. Loans with high LTV ratios may also require borrowers to buy private mortgage insurance (PMI) to lessen the risk to the lender, which can range from 0.5% to 1.5% of the loan amount.

An 80% LTV ratio is generally considered desirable by most lenders. Lower ratios can lead to better borrowing terms. However, if the LTV exceeds 80%, costs can increase, or loan applications may be declined.

How is LTV calculated?

The LTV is calculated by dividing the mortgage amount by the appraised value of the property. For instance, if you aim to buy a house with a value of $200,000 and you have a down payment of $40,000, you would need a loan of $160,000. So, your LTV ratio would be $160,000/$200,000, which is 80%.

What is the significance of LTV in mortgage lending?

The loan-to-value (LTV) ratio is a significant factor in determining the eligibility for a mortgage or home equity loan and the interest rate a borrower can get. Lenders usually offer the lowest interest rates to applicants with an LTV ratio of 80% or below. 

For instance, a borrower with an LTV ratio of 95% may receive a loan, but the interest rate could be a full point higher than for someone with a 75% ratio. Keep in mind that lenders might make exceptions for borrowers with other qualifying factors such as high income, low debt, or large investment portfolios.