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What Is Loan-To-Value?

Ajay Jain

27 Jan 2020 Private Mortgages

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What Is Loan-To-Value?

Loan-to-value or LTV is an assessment of lending risk private lenders evaluate to determine the level of liability they would be taking on in providing a loan. LTV is expressed as a percentage, with 80% as a baseline for a healthy LTV. Once you ascend above 80% lenders begin to perceive you as higher risk, which will elevate a borrower’s interest rate.

In general, Canada’s major banks will lend on LTVs up to 80%, so long as you meet their lending criteria, largely based on credit score and income. In contrast, private lenders are willing to provide financing regardless of your credit score and are much more lenient with LTV during their qualification assessment. Some private lenders will go as high as 95% loan-to-value.

Loan-to-value will also contribute in determining your interest rate. The higher your LTV, the higher interest or loan rate lenders will charge due to the perceived risk associated with higher loan-to-values.


How Do you calculate Loan-To-Value?

Calculating LTV is done by dividing the dollar amount you’re requesting for your loan or mortgage by the appraised value of your property.

LTV = Mortgage Amount / Appraised Property Value

Example:

Mortgage Amount = $800,000

Property Value = $1,000,000

LTV = 80%

Generally, lenders will require a licensed property appraisal to be completed ahead of financing, but you can use market value estimations on your home in the meantime.


What Loan-To-Value do I need in order to qualify?

Maximum LTV will differ depending on what product you’re applying for as well as your credentials such as credit score, equity, and income. For reference, Rateco offers the following maximum LTVs:

  • Up to 80% for refinances
  • Up to 95% on home purchases
  • Up to 95% on second mortgages
  • Up to 95% on home equity loans
  • Up to 95% on debt consolidation loans


How can I improve my Loan-To-Value?

If you’re having trouble obtaining financing due to a high LTV, you can consider the following solutions to improve your LTV.

  • Increase your down payment – this will in theory decrease your mortgage amount, improving your loan-to-value and borrowing capacity.
  • Get a second opinion on property appraisal price – a more generous appraised value will help lower your LTV
  • Decrease your home purchase price – sometimes the only solution to obtaining financing is to reconsider your options. Compromising on square footage or amenities may greatly improve your borrowing capacity.