Loan-to-Value Explained

When dealing with mortgages, either buying a home or taking equity out of your current one, your loan-to-value is crucial. This article explains what you need to know in simple terms.

As with most matters of finance, there are exceptions, special cases, and other nuances that can affect you. We won’t go into all of the details here. Our goal is to give you an understanding, not throw a textbook at you.

What is Loan-to-Value?

Loan-to-value (LTV) is the amount you owe on your mortgage divided by the market value of your home. Think of it as how much of your home the bank owns.

LTV Explained

Example:

If you own a home worth $500,000 and your remaining mortgage is $250,000, then your LTV would be $250,000/$500,000 = 50%

It is a common metrci that financial institutions use to base their decisions on.

How Does Loan-To-Value Correspond To A Down Payment?

When you first get buy a home, your loan-to-value (LTV) is directly correlated to your down payment.

LTV = (100% – Down Payment)

Ex: 80% LTV = (100% - 20% down payment)

As you make mortgage payments and as the value of your home rises (hopefully), your LTV falls, which is good. See the infographic below for a more detailed description

LTV Over Time

What Loan-To-Value Can I Get (i.e. What Down Payment Do I Need?)

This is the million dollar question and is where most of the confusion lies.

In the interest of brevity, this article focuses on the maximum LTV banks are allowed to provide. That doesn't mean that they are willing to, however.

In broad strokes, the maximum LTV you can get depends on a few factors:

  • The type of your income - Self-employed persons are more restricited. However, there are ways around this
  • The price of the home - Different maximums apply depending on the price of your home. See here for more details
  • The purpose of the loan - Primary residences can get higher LTV's (smaller down payments) compared to a rental property and a purchase can go to a higher LTV than a re-finance

The graphic below sums up the most you can get in the most common situations. Max LTV in Canada

If My Current LTV is Less Than My Maximum, Can I Take Some Equity Out?

If you are below 75%-80%, then yes.

Keep in mind, that your max LTV differs depending on the purpose of the loan. The maximum LTV you can get for a purchase is 95% (5% down). However, you can't refinance up to that much.

The graph below provides an example of available equity. Available Equity in Canada

How Do I Take Equity Out Of My Home?

It's actually quite easy. You have a few options available to you, depending on your financial situation.

If you would like to speak with one of our experts, you can arrange a phone call to explore your options.

Just click here to book an appointment with one of our experts.

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