Loan to Value Ratio, or LTV, is a common term in the world of finance. It's used by lenders to determine how much they can lend you on your property. The higher your LTV, the fewer options you'll have for borrowing money for a home loan. If your purchase price is below the maximum LVR allowed by your lender, there are ways you can help boost it and increase your chances of getting approved for a loan:
How is Loan to Value ratio calculated?
Loan to value ratio, or LTV, is the amount of money you borrow against property. It's calculated by dividing the loan amount by the property value. The higher your LTV, the more risky it is for a lender to lend you money—and in turn, they will charge higher interest rates and fees. For example: A $200k mortgage with a $50k down payment has an LTV of 50%, while a $250k mortgage with another $50k down payment has an LTV of 25%.
Lenders look at your credit score and debt-to-income ratio (or DTI) as well as other factors when determining whether or not you qualify for financing at all. But because lenders don't want to take on too much risk when lending out money for mortgages and auto loans, they tend to prefer borrowers who have lower Loan To Value ratios over those with high ones.
Why does LTV matter?
LTV is used by lenders to decide how much they will lend. It's a tool that helps them gauge the risk of lending money to you, so it's important to know what it means and how it affects your borrowing power.
The higher your LTV, the more likely it is you'll default on your loan. For example, if you're buying a house with an 80% LTV (so 20% down payment), then if interest rates rise or prices drop, you won't be able to afford anything close to the same house because now you have 20% less equity and therefore 20% less purchasing power than before.
What is a good LTV for home loans?
The LTV ratio is a measure of how much you owe in relation to the value of your home. The higher your LTV, the more money you'll need to make monthly payments on top of loan-related costs such as insurance and taxes. On the other hand, a lower LTV means that you can qualify for a larger loan amount—and potentially get yourself into more debt!
The good news is that lenders look at many factors when determining whether or not someone qualifies for a mortgage loan. For instance:
- Your credit score (the higher it is, generally speaking)
- The type of down payment required**(the amount required by lenders differs depending on where you live)
What is considered a high LTV?
- A high loan to value ratio is often considered to be greater than 80%.
- In general, if you're buying a home for more than 20% of the purchase price, your lender will likely require you to have private mortgage insurance (PMI).This makes sense because if you can't afford the down payment and closing costs on a new home, then something isn't adding up. Also, since PMI usually includes an annual premium that's added onto your monthly mortgage payments, it can really add up over time.
If you're looking at buying a newly constructed house or condo with zero down payment and no private mortgage insurance required - congratulations! But keep in mind that these deals are rarer than some people think they are so don't expect them everywhere.
How do lenders use LTV to calculate my home loan repayments?
LTV is a simple way to measure your loan, and it allows lenders to calculate how much you can afford. Let's imagine that the value of your home is $500,000 and you have a deposit of 20%. This means that if you borrowed 80% of the house price ($400,000) then your Loan To Value Ratio (LTV) would be 80%.
Lenders use LVR to calculate exactly how much they'll lend to you, but they also use it as an indicator of risk. If someone has a high LVR, then lenders think there's more chance that they won't be able to repay their home loan than someone with a low LVR because there will be less equity in their home.
How can I lower my LTV and get the best deal on my loan?
There are a few ways to reduce your LTV and take advantage of lower interest rates. The most obvious is to save for a larger deposit, but that can take months or even years to accumulate. If you're looking for quicker results, here are some other options:
- Settle for a lower interest rate
- Go for a shorter loan term (i.e., 15 years instead of 30)
- Reduce your interest rate by paying off the loan faster
What if my LTV is too high to get a home loan approval?
If your LTV is too high, it means the amount of money you are borrowing to buy a property is too close to the value of that property.
For example, if you have a 20 percent deposit and borrow 80% against an $800,000 property (which has an estimated value of $1 million), then your LTV would be 80%. This may result in a lender not approving your loan application because they consider this too risky—you are using too much borrowed funds relative to what you've saved up as equity in the property.
However, if you had put down 30%, which means only 70% was being borrowed against the total purchase price (i.e., $600k), then this would be considered less risky by lenders—as long as everything else looks good!
I hope that this article has helped you understand what loan to value (LTV) is, why it matters and how lenders use your LTV to calculate your home loan repayments.
If you have any questions on the topic, please feel free to contact us and we will be happy to assist.