How to calculate Loan-to-Value ratio (LTV)? There are some details you need to know before going into detail about LTVs. Lenders always prioritize the amount a homeowner requests to borrow when structuring a secured mortgage. The loan amount depends on the down payment for a principal loan. 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 principal mortgage on an existing property, it depends on the existing equity in the home.
The home’s appraised value significantly impacts the amount a lender is comfortable lending. A lender assesses your home’s market value, equity, and uses a standard calculation 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. Understand this term as it helps mortgage brokers and lenders assess the risk of each mortgage loan.
The term represents the ratio of the first mortgage amount of the total appraised value of the real property. The equation is loan value (requested mortgage amount) divided by appraised value (property’s value).
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 75% to 80% Loan-to-Value. Some banks (A lenders) may lend up to 90% to 95% LTV. This LTV ratio is considered a very high LTV and, therefore, carries with it added risk. For high-risk mortgages, lenders seek substantial collateral, excellent credit, and a verifiable yearly salary.
Another reason for an 80% Loan-to-Value is that the gold standard in the mortgage industry relates to insurance. If a borrower can put down 20% 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 borrower’s overall monthly payments. This increases the borrower’s monthly overall mortgage payments.
If banks reject Ontario homeowners, experienced private lenders can offer secured 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.
LTV Examples
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 80% financing (80% LTV)
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.
Here is an example of a property with a $500,000 first, requesting a $250,000 second, and has an appraisal value of $1,000,000.
(500,000+250,000)/1,000,000 = 75%
The banks would see these examples as a low risk Loan-to-Value loan.
Level of Risk and Types of LTV
1. Higher than 85% LTV- 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. 75% to 80% LTV– All lenders in Ontario including private lenders will loan up to 75% LTV and no more. This is considered the standard LTV in the mortgage industry.
3. 65% to 75% LTV– 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 65% LTV- 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 who do not have strong credit or are 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. Email ron@mortgagebrokerstore.com or call 416-499-2122.
