When structuring a secured mortgage, lenders including banks, credit unions as well as private lenders have always paid considerable attention to the amount the homeowner is asking to borrow. The loan amount is contingent on how much can be put down as a down payment (if this is a principle loan) or the existing equity in the home for other secured mortgage options such as second mortgage loans, Home Equity Lines of Credit (HELOC), Home Equity loans, or negotiating terms for a new principle mortgage on an existing property.
The appraised value of the home also plays a significant role when determining the eventual amount, a lender feels comfortable lending out. A lender will assess the current market value of your home, look at the amount of equity that you have acquired in your property and utilize a calculation that is preferred by all lenders to determine the final loan amount.
Lending is based on assessing risk. To mitigate risk, lenders will ensure as best they can that the money will be there to repay the loan. To best access risk, all Ontario lenders will calculate what is called the Loan-To-Value (LTV).
What is LTV?
Let’s define the term that the mortgage industry refers to as Loan to Value. You must be clear on the exact meaning of this term that helps form the basis of decisions that mortgage brokers and lenders use to determine the risk of each particular mortgage loan.
The term represents the ratio of the first mortgage amount of the total appraised value of the real property. The equation breaks down as literally loan value (requested mortgage amount) divided by the appraised value (the value of the property in question.)
Equation: Loan/Value= LTV
The gold standard Loan to Value ratio that the banks and major lenders have generally agreed upon for mortgage loans is Seventy-Five to Eighty percent loan to value. Some banks (A lenders) may lend up to Ninety, Ninety-Five (90% LTV or 95% LTV). This LTV ratio is considered a very high LTV and therefore carries with it added risk. To loan out a high-risk mortgage, a lender will be looking to substantial additional assets to secure the loan against, exemplary credit, and an easily proven yearly salary.
Another reason an Eighty percent Loan-to-value is the gold standard in the mortgage industry relates to insurance. If a borrower can put down twenty percent towards financing a mortgage, then there is no need to apply for mortgage insurance through the Canadian Housing and Mortgage Corporation (CHMC).
This mortgage insurance is an added expense for the borrower and is rolled into the overall monthly payments for the borrower. This increases the borrower’s monthly overall mortgage payments.
If Ontario homeowners have been turned away by the banks there exist well-established and experienced private lenders that will be able to offer secured private loan options. When private lenders are negotiating secured mortgage loans, the LTV will not exceed 75% which represents 75% of the appraised value of the property in question.
To illustrate how LTV is calculated for a principal loan amount with an 80% LTV the numbers will look like this:
The value is 200,000.
The down payment is 40,000.
The loan request should be 160,000.
This represents eighty percent financing (Eighty percent loan to value)
If an LTV is calculated on a secured mortgage which represents an additional mortgage on a home (second mortgage, home equity loan, or HELOC for example) then the lender will be assessing the current appraised value against what equity is built in the home. A down payment would not be applicable in this loan arrangement. Private lenders will not loan over 75% LTV.
Appraised Value- 100,000
Loan Amount- 75,000 (75 percent of the appraised value of the home)
The equation used in this example would be:
75,000/100,000 or Loan amount divided by the appraised value.
The banks would see these examples as a low-risk loan-to-value loan.
Types of LTV- Level of Risk
1. Higher than Eighty-Five Percent Loan to Value- The banks will occasionally loan out these higher-risk loans but may ask the homeowner for an added interest rate premium to offset the risk associated.
2. Seventy-Five to Eighty-Percent Loan to Value– All lenders in Ontario including private lenders will loan up to 75% LTV. This is considered the standard LTV in the mortgage industry.
3. Sixty-Five to Seventy-Five Percent Loan to Value– A loan with 65% to 75% LTV is considered very secure. Demonstrated additional assets will not be required as this is deemed a lower risk for a potential lender.
4. Less Than Sixty-Five Percent Loan to Value-This is an example of a low-risk loan to value loan and as a result, it is very secure. The homeowner is borrowing less against the value of the property and as such there will be no need for extra collateral or interest rate premiums.
Private Lenders and Secured Mortgage Options
If your credit has been damaged or income may have been reduced, private lending options are widely available for an Ontario homeowner. A private lender will be calculating the LTV on a secured private loan option just as all the other lenders in the Province.
Unlike other lenders that may lend up to 95% LTV, private lenders will be able to provide loan options based on LTV that will not exceed 75% LTV for homeowners that do not have strong credit or unable to meet the criteria that are required by the banks. Private lenders will assess the LTV and look at the property location when determining mortgage loan approval. These mortgage loans will be short-term loans (generally 1 to 3-year terms) and will be negotiated faster than with other Ontario lenders. Mortgage Broker Store can help you achieve your mortgage goals. We have access to a broad network of private lenders throughout the Province who can negotiate various private mortgage loan options depending on your unique set of financial circumstances. Don’t hesitate to contact us at your convenience to secure your mortgage goals.