The Loan-to-Value (LTV) ratio compares the size of a mortgage to the value of the property being purchased. It shows how much of the home’s value is financed by debt versus the borrower’s own down payment.
How It’s Calculated
LTV = (Mortgage amount ÷ Property value) × 100. For example, if you buy a $400,000 home with a $320,000 mortgage, the LTV is 80%.
Why It Matters
- For lenders: A lower LTV means lower risk, since the borrower has more equity in the home.
- For borrowers: A lower LTV can lead to better interest rates and eliminate the need for mortgage insurance.
Limits in Canada
In Canada, the maximum LTV for most mortgages is 95%, meaning buyers must make at least a 5% down payment. For refinances, the limit is usually 80%.
Final Thoughts
The LTV ratio is a key factor in mortgage approval and pricing. Lowering your LTV by increasing your down payment can save money and improve borrowing options.