Understanding Your Loan-To-Value Ratio: Why It Matters in Mortgage

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Overview Of Mortgage Loan-To-Value (LTV) Ratio

The loan-to-value ratio, or LTV, is one of the most important things to know when considering a home loan. The LTV ratio shows what percentage of your property’s value is financed by the loan. It also indicates the loan exposure (risk) your lender is willing to take for your property.

Knowing your LTV allows you to better prepare for a mortgage refinance or home purchase.

Several factors impact the LTV, which as well affects your mortgage loan. Some factors include credit score, property value, property type, income, and property location. A low LTV ratio indicates less risk to the lender, and a high LTV ratio suggests an increased risk.

What Is Loan-To-Value (LTV) Ratio In Mortgage?

Loan-to-value is the ratio of a mortgage loan to the value of your property.

Mortgage lenders used LTV ratios to measure how much risk they would take with a mortgage loan. The lower the LTV, the less risky you are viewed by lenders and the better rate and terms you can get.

The higher your LTV, the riskier you are considered for a mortgage, resulting in a higher mortgage rate or the need for a default insurance premium.

How Is LTV Calculated?

To calculate your LTV ratio, divide the mortgage loan amount by the value of your property.

If you buy a house, the property value will be the purchase price, and the loan amount will be the property value minus your down payment. On the other hand, if you are refinancing, the property value will be the property’s market value, and the loan amount is what you request from the bank.

For example, suppose you want to buy a house for $300,000 and have $75,000 available for your down payment. So, your mortgage loan amount will be $225,000.

House Purchase
Purchase Price	$300,000
Down Payment	$75,000
Loan amount	$225,000
Calculation	$225,000/$300,000 = 0.75
LTV	75%

Your LTV will be 75 percent. So, the amount of your mortgage is 85 percent of the house price.

For refinancing, let’s assume your property is valued at $400,000, and you need a mortgage of $295,000. Your LTV ratio will be 73.75%, meaning the loan amount for your house value is 73.75 percent.

Mortgage Refinance
Property Value	$400,000
Loan amount	$295,000
Calculation	$295,000/$400,000 = 0.7375
LTV	73.75%

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Loan-To-Value Restrictions For High-Ratio Mortgages

In Canada, lenders are required to lend only above 80 percent of the property value for default-insured mortgages.

A high-ratio mortgage is a loan that makes up more than 80 percent of the property value. That translates to a down payment of less than 20 percent.

Default mortgage insurance providers such as CMHC, Sangen, and Canada Guaranty have a minimum credit score and credit record eligibility requirements that you need to satisfy to qualify.

If you do not qualify for mortgage default insurance, buying a house with less than a 20 percent down payment or getting a mortgage above 80 percent of the property value will be hard.

To qualify for a high loan-to-value ratio mortgage, you will need a minimum credit score of 600, a provable steady income stream, and a property value of less than \$1 million. The property must be your owner-occupied property.

Loan-To-Value Restrictions For Conventional Mortgages

These are mortgages that are not default-insured. As explained above, you need to put down a minimum of 20 percent of the property value to qualify for a default-insured mortgage. Mortgages from B-lenders, uninsured prime mortgages, and some private mortgages will fall into this category.

Because uninsured mortgages are considered riskier than default-insured mortgages, lenders often place more weight on the marketability potential of the property used to secure the mortgage loan. Mortgage lenders typically prefer houses in urban areas to homes in rural areas, detached houses to condo units, and properties on municipal water systems to well and septic systems.

It is easy to find a lender who will lend up to 80 percent of the property value for houses with these preferred attributes.

There are no universal LTV guidelines for conventional mortgages. The maximum LTV offered to you may differ from one lender to another.

Let’s review these restrictions in detail.

Property Type And LTV Restrictions

We may say that the condo market is booming, with units selling at top dollar. Unfortunately, some mortgage lenders don’t see it that way and will offer a lower loan-to-value ratio for condo units than for detached or semi-detached properties.

Lenders typically offer their maximum non-insured mortgage LTV ratio of 80 percent of the property value for detached, semi-detached, and townhouses because of their low marketability risk.

On the other hand, these lenders will offer a lower LTV maximum for condos than detached or semi-detached houses. These lenders see condo units as riskier because the homeowner has less control over the operation and management of the property. Your unit’s marketability risk depends on the attractiveness of the entire condo building, which is hard to control.

If you happen to go to one of these lenders for your mortgage for your condo property, expect a lower LTV ratio limit regardless of where the property is located.

Some lenders will offer a lower LTV maximum for condos than detached or semi-detached houses, regardless of where the apartment is.

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The Property Location And LTV Restrictions

Where your property is located also affects the loan-to-value ratio a lender will offer. Again, there is no universal standard. Each lender sets its LTV guidelines.

Typically, lenders prefer properties in urban areas with more than 30,000 people for their low-ratio mortgage products.

These lenders will offer up to 80 percent of the property value for properties in urban areas. These urban areas have active real estate markets. The LTV ratio limit starts declining as you move further out of the city to rural communities.

Some lenders restrict their maximum LTV to 65 percent of the property value for properties in rural areas or areas with populations less than 10,000.

Well-And-Septic Systems And LTV Restrictions

Like where the property is located, lenders, especially B-lenders, will require a lower loan-to-value ratio if the property has a well and septic system.

Wells and septic systems are standard for properties in rural communities. Wells and septic systems guidelines of keeping the water and septic safe, which, if not followed, might make the property less attractive to potential buyers, which is a marketability concern for most lenders.

Most alternative institutional lenders limit their mortgage exposure to 65 percent for wells and septic systems properties.

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Understanding Your Loan-To-Value Ratio: Why It Matters in Mortgage

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In This Guide

Overview Of Mortgage Loan-To-Value (LTV) Ratio

What Is Loan-To-Value (LTV) Ratio In Mortgage?

How Is LTV Calculated?

Shop Across 25+ Lenders For Your Best Mortgage Deals

Loan-To-Value Restrictions For High-Ratio Mortgages

Loan-To-Value Restrictions For Conventional Mortgages

Property Type And LTV Restrictions

Shop Across 25+ Lenders For Your Best Mortgage Deals

The Property Location And LTV Restrictions

Well-And-Septic Systems And LTV Restrictions

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