What Is Loan-To-Value (LTV) Ratio And How To Calculate It

The loan-to-value ratio is a simple formula that measures the amount of financing used to buy an asset relative to the value of that asset. It also shows how much equity a borrower has in the home they’ve borrowed against—how much money would be left if they sold the home and paid off the loan. LTV is the inverse of a borrower’s down payment. For example, a borrower who provides a 20% down payment has an LTV of 80%. This is called a low-ratio or conventional mortgage.

LTV is important because it determines whether or not you need to purchase mortgage default insurance, which protects your lender in case you default on the loan and the lender has to foreclose. If you put less than a 20% down payment–and therefore have a LTV of over 80%–you will need mortgage default insurance. (This is called a high-ratio mortgage.) The insurance premium charged depends on your LTV.

There are three mortgage default insurance providers in Canada: CMHC, Sagen (formerly Genworth Financial Canada) and Canada Guaranty.

The cost of mortgage default insurance is calculated as a percentage of the LTV.

While the premium charged may differ between lenders, here is an example of premiums charged by the CMHC at the different LTV thresholds:

What Is a Good LTV?

What constitutes a good LTV varies by the type of asset being financed. When buying a home, an LTV of 80% or under is generally considered good—that’s the level you can’t exceed if you want to avoid paying for mortgage insurance. In order to achieve an 80% LTV, borrowers need to make a down payment of at least 20%.

While 80% is considered adequate, conservative homeowners may want even lower LTVs in order to reduce their monthly payments or try to qualify for better interest rates. However, keep in mind that an insured mortgage, that is a mortgage with at 80% LTV or higher, may have a lower interest rate than an uninsured mortgage.

Your LTV will change over time, for example, as you pay off your mortgage or as your home appreciates in value.

Also, high-ratio mortgages (or mortgages with LTVs of 80% or higher) have certain restrictions including:

• The maximum amortization period is 25 years.
• The maximum purchase price for a home is $1 million.

To calculate your loan-to-value, all you need to do is to find the total amount borrowed against an asset. Then, divide that total by the appraised value of the property being financed.

LTV = Loan amount / Property value

For example, a $400,00o home with a 20% down payment (or $80,000) means you’ll need a mortgage for $320,000. Therefore your LTV is 80%, or $320,000/$400,000.

Make a larger down payment: For example, if you wanted to borrow $400,000 and put down $20,000, your LTV would be 95%. You need to put down at least 5% towards the purchase of a home in Canada.

Choose a less expensive property: Putting down $20,000 on a $300,000 house instead of a $400,000 house would give you an LTV of 93.3%.

Over time, paying down your loan’s principal balance will also lower your LTV. And if your home increases in value, that will lower your LTV, too.

To get approved for a home loan, it’s generally good to plan to make a down payment of at least 20% of the home’s value—this would create an LTV of 80% or less. Otherwise, you’ll need to purchase mortgage insurance in order to get approved.

LTV is also important because, if you’re buying a home and the appraised value of the home turns out to be substantially lower than the purchase price, you may need to make a larger down payment so that your LTV doesn’t exceed limits set by your lender.