Calculating your loan-to-value (LTV) ratio is a crucial step in understanding your financial position when applying for a loan. This way, you can determine how much of your property’s value needs to be financed, the size of the down payment you’ll want to contribute and what you might expect in terms of interest rates. But fear not, we’re here to break down this complex concept in simple terms. In this guide, we’ll show you how to calculate your LTV ratio, explaining why it matters and how it affects your borrowing power.

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Key Takeaways

• Loan to value (LTV) is a percentage based on the mortgage loan amount you require compared to the value of the home you’re looking to purchase
• If your down payment is less than 20% of the total value of your home, your mortgage is considered high ratio and you’ll need mortgage default insurance 
• The maximum LTV can be 95% if you’re purchasing a property in Canada worth up to $500,000. Any amount of the purchase price above that threshold, however, requires a 10% down payment.

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What is loan-to-value (LTV)?

The loan-to-value ratio is the ratio of the mortgage loan amount you need to the appraised value of the property. Lenders use this ratio to assess the risk associated with a loan. A higher LTV indicates a higher risk for the lender, as it means the borrower has less equity in the property. Generally, lenders prefer a lower loan-to-value ratio, as it reduces their exposure to potential losses. The LTV ratio is an essential factor in determining the terms and conditions of a loan, including interest rates and required down payment.

In this way, a larger down payment will decrease your LTV ratio. It will also decrease as you pay down your mortgage every month or when the value of your property increases. 

How to calculate loan-to-value (LTV)

In order to calculate the loan-to-value (LTV) ratio, you must divide the mortgage amount by the property value. In the case of a home purchase, the property value is the purchase price of the home and the mortgage loan amount is the purchase price minus the amount of your down payment. 

If you’re refinancing an existing mortgage or switching mortgage lenders at renewal time, your home will likely have to be appraised in order to determine its current value. In most cases, as the borrower, you’re responsible for paying the appraisal fee. 

A home appraisal is an estimation of a home’s fair market value conducted by a professional appraiser. Appraisals typically cost between $300 and $500, but can vary based on a number of factors, including the property’s location, age and condition. (See: What is a Home Appraisal? Costs & Considerations.)

Sample calculation of LTV ratio

Your down payment has a significant impact on your loan-to-value ratio. 

As an example, if you’re purchasing a home worth $600,000 and you have a 10% down payment ($60,000), you’ll need a mortgage totalling $540,000 (purchase price minus down payment), which is 90% LTV.

However, if you contributed a 20% down payment ($120,000) on that same home, your mortgage loan would total $480,000 with a much lower LTV at 80%.

It’s important to note that the minimum down payment across Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. (See: How Much Do You Need for a Down Payment in Canada?)

What does my Loan-to-Value Ratio mean?

Loan-to-value ratio is one of the ways lenders will assess risk when evaluating a borrower. A lower LTV ratio is preferred and can help the borrower get a lower rate or better loan terms. Here’s what it means to have a high LTV ratio vs a low LTV ratio.

High-ratio vs low-ratio mortgages

High-ratio mortgages: If your down payment is less than 20% of the total value of your home, your mortgage is considered a high ratio. 

Low-ratio mortgages: if your down payment is 20% or higher, your mortgage is considered low ratio or conventional, which means you’re not required to pay mortgage default insurance.

	High-ratio mortgage	Low-ratio mortgage
Loan-to-value (LTV)	80% or more	80% or less
Minimum down payment	5% up to $500,000; 10% after $500,000	20%
Mortgage default insurance	Required	Not required
Max. purchase price	$1 million	No maximum
Max. amortization period	25 years	No maximum
Debt-service requirements	Strict requirements	No limit

Mortgage default insurance is required for all high-ratio mortgages because it offers security to your lender by protecting them in case you’re unable to make your mortgage payments. (See: Mortgage Default Insurance Calculator.)

The maximum LTV varies depending on whether you’re purchasing a property, refinancing an existing mortgage or looking for a home equity line of credit (HELOC).

Frequently Asked Questions

Final Thoughts

Your loan-to-value ratio is the percentage of the home value you need to put down on your mortgage loan in order to qualify for the loan. Ideally, you want to keep your loan-to-value ratio as low as possible, because it reduces your lender’s risk of losses. In a healthy real estate market, a lender will more than likely offer a loan with a low loan-to-value ratio, but it may require a larger down payment from the borrower. If you have more questions about how your LTV ratio can influence your qualification for a mortgage, do not hesitate to reach out to one of our mortgage experts.

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