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Learning how to calculate your loan-to-value (LTV) ratio is an important step to understanding how much of a down payment you’ll have to make in order to qualify for a mortgage as well as if you want to avoid paying mortgage default insurance premiums by putting down at least 20%. We’ve outlined everything you need to know about LTVs below to help make the process much easier – whether you’re buying a home, refinancing an existing mortgage or applying for a home equity line of credit (HELOC).
- 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
What is loan to value (LTV)?
Much like it sounds, when it comes to mortgage financing, 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.
Important: As you pay down your mortgage every month, your LTV will decrease. It will also decrease as your property value rises
How to calculate loan to value (LTV)
In order to calculate the loan to value LTV, you must divide the mortgage amount by the property value. If you’re purchasing a home, 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
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.
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?)
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High-ratio vs low-ratio mortgages
If your down payment is less than 20% of the total value of your home, your mortgage is considered a high ratio.
And, conversely, 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.
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.)
Tip: 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
What is the maximum loan to value?
The maximum loan to value 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.
What is the maximum loan to value for a HELOC?
The maximum loan to value for a home equity line of credit (HELOC) is 65% of the value of your home. But, it’s also important to note that your mortgage balance plus your HELOC amount combined must not add up to more than 80% of your home’s total value.
What is the maximum loan to value for a refinance?
The maximum loan to value for a refinance is 80% of your home’s value.
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