What is a loan to value ratio?
- Definition of Loan to Value Ratio
The loan to value ratio, also known as the LTV, is a financial calculation used by banks and mortgage lenders to express the percentage of loan the total appraised value of a property. Loan to value is calculated using the appraised value of a home and the total amount of loan taken out to purchase the home.
Why is this term important?
The loan to value ratio is a risk assessment tool used by financial institutions to determine whether or not additional costs are passed on to borrowers. If there is a high loan to value ratio, the borrower may have to pay additional fees or take on a mortgage with higher rates. In Canada, high LTV loans are considered to be any mortgages where the buyer has put less than 20% of their own money as a down payment on a property.
High LTV ratios are a signal that borrowers will need to pay mortgage default insurance. This insurance, which is offered by either the Canada Mortgage and Housing Corporation (CMHC) or Genworth, protects the mortgage lender should a borrower default on the mortgage loan. The fee for this insurance is a one-time cost and it's calculated based on how much money a buyer puts towards the down payment on a home. The bigger the down payment the cheaper the Genworth or CMHC fees.
Examples of term
If a buyer puts $25,000 towards a home appraised at $100,000, the LTV ratio is 25%.