What is Loan to Value Ratio? (2024)

FAQs

What is a good loan to ratio value? ›

As a rule of thumb, a good loan-to-value ratio should be no greater than 80%. Anything above 80% is considered to be a high LTV, which means that borrowers may face higher borrowing costs, require private mortgage insurance, or be denied a loan.

LTV is the inverse of a borrower's down payment. For example, a borrower who provides a 20% down payment has an LTV of 80%. LTV is important because lenders can only approve loans up to certain ratios—80% for Fannie Mae and Freddie Mac loans, for example.

LTV stands for loan-to-value ratio, is the ratio of loan to the market value of purchased house or the property which is pledged as collateral. It is a financial indicator used by lenders to assess the risk associated with a home loan.

Homeowners can easily calculate the LTV ratio by dividing the current mortgage amount for their home by the appraised property value. So, for a home with a mortgage of $120,000 and an appraised property value of $200,000, the LTV is 60% ($120,000 ÷ $200,000 = 60% LTV ratio).

If the loan-to-value were 90% for a $200,000 home, the required down payment would be $20,000.

This compares annual payments to service all consumer debts—excluding mortgage payments—divided by your net income. This should be 20% or less of net income. A ratio of 15% or lower is healthy, and 20% or higher is considered a warning sign.

Loan-to-value ratios are easy to calculate. Just divide the loan amount by the current appraised value of the property. For example, if a lender gives you a $180,000 loan on a home that's appraised at $200,000, you'll divide $180,000 over $200,000 and get an LTV of 90%.

The Ideal LTV Ratio

If you're aiming for the sweet spot, an LTV under 80% is generally where you want to be. While higher LTVs can help you get on the property ladder faster, they come at a cost—higher interest rates. It's a balancing act between immediate access and long-term financial health.

See loan deals and your chances of approval. Eligibility is scored as a percentage – over 70% shows a strong chance of approval. We'll also show deals where you're pre-approved.

A loan-to-value ratio of 60% or less will open up the best mortgage rates from lenders. There is often little difference in the rates offered by lenders once you go beyond 60% loan to value, even if you get to 40% or 20%.

Is it better to have a low or high loan-to-value ratio? ›

In general, the lower your LTV ratio, the better — you'll be less likely to owe more than the home is worth if home values were to significantly drop.

Loan to value – or LTV – is the ratio of the value of the home you want to buy and the loan you'll need to buy it, shown as a percentage. Having a good LTV can lower the interest rates offered to you and mean you have more equity in your home. A higher LTV is a greater risk to lenders if the property market drops.

To figure out your LTV ratio, divide your current loan balance (you can find this number on your monthly statement or online account) by your home's appraised value. Multiply by 100 to convert this number to a percentage. Caroline's loan-to-value ratio is 35%.

Generally, you might be able to find 40% and 50% LTV mortgages. If you go any lower than that, you're probably better off saving some money and buying the property right away. However, an extremely low LTV means you'll have to provide a large deposit (or have lots of equity) on the property.

While you might pay higher interest on a car loan with a higher LTV ratio, there's no threshold comparable to the 80% LTV that earns the best mortgage loan terms. When an LTV ratio is greater than 100%, a borrower is considered underwater on the loan.

Having an LVR of 80% or lower may help you borrow more at lower rates and with lower repayments. If you have an LVR of more than 80%, you may need to pay Lender's Mortgage Insurance or ask a family member to act as a guarantor to offset the risk.

If you have a deposit of 10% or 20% of the home's value, you'll have a relatively high loan-to-value ratio. This means the bank won't offer you the best deals and you might have high interest rates. But, after a few years of paying off your mortgage, you'll bring your LTV down.

What is the best loan-to-value ratio for a mortgage? Ideally, you should aim for an LTV of under 80%. Generally speaking, the lower your LTV, the lower your interest rate is likely to be. That means the smaller your monthly repayments, and the cheaper your mortgage will be overall.

In general, most lenders finance up to 80% of a project. Some lenders finance a greater percentage, but this typically involves a significantly higher interest rate.