What is the Loan-to-value ratio
Loan-to-value ratio (LTV) is a way for lenders to measure how much of a property’s price you are borrowing versus how much you are paying yourself as a down payment.
The formula for the loan-to-value ratio is:
LTV = (Mortgage amount ÷ Property value) × 100
For example, if you buy a residential property with purchase price of $500,000 and put 5% down. This means that your downpayment is $25,000 and your mortgage will be $475,000. This means that your loan-to-value ratio is:
LTV = (475,000 ÷ 500,000) × 100 = 95%
This means that you are borrowing 95% of the home value and you are only putting down 5%.
Why is loan-to-value ratio important?
Lenders use the loan-to-value (LTV) ratio to assess mortgage risk. A higher LTV increases the lender’s exposure. For example, if your LTV is 95% and you default, the bank risks 95% of the property’s purchase price. If your LTV is 80% instead, the bank’s exposure drops to 80%.
In Canada, lenders must obtain mortgage insurance for any mortgage with an LTV over 80% (meaning a down payment under 20%). Banks arrange this insurance on your behalf and must use one of three approved providers: CMHC, Sagan or Canada Guaranty. These insurers determine the maximum LTV they will cover, which effectively influences how much a bank can lend.
Important Note