Loan To Value ratio (LTV) Definition
The Loan to Value LTV ratio is the percentage of the property's value compared to the mortgage amount.
LTV looks at the amount you are looking to borrow relative to the appraised value of the home. If the home you’re looking at buying is worth $300,000 and you have a $15k downpayment (5%), you will be borrowing 95% of the property's value through a mortgage, or said another way, you will be borrowing at a 95% LTV.
The loan to value ratio is one of the factors that lenders consider when reviewing a mortgage application. The more money you have to put down (also called equity), the stronger your application will be!
According to the current CMHC regulations, the minimum down payment required on a home is 5%. This means that at a maximum, the LTV ratio will be 95%. This will qualify as a high ratio mortgage and will require mortgage loan insurance as the chances of default are higher than a conventional mortgage.
Conventional Ratio Mortgages 80% LTV
A conventional mortgage is one that has a LTV ratio of 80% or less (essentially mortgages with a 20% down payment) and may qualify for 30 year amortization periods as well as waiving the need for mortgage insurance.
Because of the reduced loan amount, saving for a larger down payment is generally a sound decision as there will be less interest to pay throughout the life of the loan. A larger down payment can be made with one’s own resources (ex. cash, stocks, bonds) as well as gifts from family members. First time home buyers also have the option of using RSP funds towards a down payment.
If your dream home is currently on the market and you happen to not have 20% saved up, again the minimum down payment in Canada is 5% of the purchase price and with any large financial decision, affordability is a key factor to consider. It is advised you speak with a mortgage broker to discuss what you can realistically afford (through a pre-approval) along with what the interest rate will be. This will ensure you are ready when you have found your dream home.
If you would like to figure out how much you can afford on a mortgage preapproval and at what LTV, please contact us now!