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Loan-to-Value (LTV) Ratio

Loan to Value Magnifying glass

What is the Loan-to-Value Ratio?

In mortgage literature you will find the LTV, or loan-to-value ratio, mentioned with some frequency. The loan to value ratio is the amount of the mortgage loan against the total appraised value of the property on which the loan is secured.

For example, if the total appraised value of a home you were eyeing to purchase was $350,000, and you had $50,000 in way of a down payment, the total mortgage loan amount you would be looking for would be $300,000; $300,000/$350,000 = 0.85, or an 85 per cent loan-to-value (LTV) ratio.

   
 

Example Loan To Value Ratios

House Value Down Payment Loan LTV Ratio
$350,000 $50,000 $300,000 0.85 (85 per cent)
$450,000 $0 $450,000 1.00 (100 per cent)
$200,000 $100,000 $100,000 0.50 (50 per cent)
 
   

For many mortgage products, such as a home equity line of credit or line of credit mortgage, an LTV or loan-to-value ratio lower than 80 per cent is required. This means that you have built at least 20 per cent equity in your property.

For example, suppose the home you purchased ten years ago has risen in value from $380,000 to $400,000. When you purchased the home, you put 20 per cent down and took out a mortgage loan of $304,000. Over the last ten years you have managed to pay down another $10,000 on that mortgage's principal. Now your loan sits at $294,000, to your current market appraisal which values your home at $400,000. $294,000/$400,000 = 0.735, or a 73.5 per cent loan to value ratio.

You can qualify to refinance up to 80 per cent of your home's loan-to-value through a mortgage refinance or home equity line of credit. These freed funds can then be put to use toward the purchase of a second property, a large investment, major renovations or university tuition – whatever expenditure you choose.

If property values decrease significantly, such as during the pop of a housing bubble, LTV ratios can actually rise in excess of the total value of the property. For example, suppose that a buyer purchases their home for $250,000. They put five per cent, or $12,500, toward their down payment. After five years the value of the property depreciates 10 per cent. Their property is now valued at $225,000. Over these five years they have only paid $1,000 toward the principal of their loan amount. Their mortgage loan now stands at $238,500/$225,000 = 1.06, or a loan-to-value ratio of 106 per cent. This is called negative equity.

When home shopping, be sure a qualified real estate professional attains a market analysis of the property you are considering for purchase to determine its true market value. Also keep in mind that on purchases involving financing of a loan-to-value (LTV) of 80 per cent or higher, mortgage default insurance will be required.

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