What Is Loan-To-Value Ratio (LTV) for a Mortgage?

One of the variables mortgage lenders look at when considering your loan application is the loan-to-value ratio, or LTV.

The loan-to-value ratio helps lenders understand how much of a home’s full value will be financed through the mortgage. Higher LTVs may be viewed as riskier loans.

Not only does your LTV affect your chances of getting approved, but it can also impact the rates you are offered.

How to calculate LTV

LTV can be used in any type of secured loan situation, but is most commonly used when talking about mortgages. LTV compares the amount of a loan against the value of the item it will purchase.

In the context of buying a new home, your LTV is the mortgage amount divided by the total value of the home. Let’s say you want to buy a home that costs $400,000. If you have a 20% down payment of $80,000, you’ll need a mortgage of $320,000.

The LTV is then determined by dividing the mortgage amount by the cost of the home. In this example, that’s $320,000 / $400,000, which equals 0.8 or 80% LTV.

» MORE: How much do I need for a down payment on a house?

Why is LTV important?

LTV is important because it helps lenders determine your risk to see whether or not they should approve you for a mortgage. The lower your LTV, the better chance you have of being approved, as the lender is loaning you less money.

Your LTV also determines whether or not you’ll pay for mortgage insurance. If your LTV is between 80% and 95%, mortgage insurance will be required. (LTV maxes out at 95% in Canada. You can't get a mortgage with less than a 5% down payment.)

Finally, as a homeowner, your LTV will determine if you’re eligible for a home equity line of credit, or HELOC, or to refinance your mortgage. For HELOCs, the maximum LTV will range from 65% to 80%. For refinancing, the maximum LTV is 80%.

What is a "good" LTV ratio?

While you can technically get approved for a mortgage with an LTV ratio of 95%, aiming for an LTV ratio of 80% or less will increase your chances of getting approved for a mortgage with favourable interest rates.

You can lower your LTV by making a larger down payment, or by choosing a lower-priced home so your down payment accounts for a larger percentage of the purchase price. Here’s how different down payments affect your LTV:

Impact of high vs. low LTV

Lenders typically interpret a lower LTV as an indication of low risk, so an LTV of 80% or less may increase your chances of being approved.

Other factors also play into your risk level, so a lender may still approve you for a mortgage with a high LTV. You just need to be prepared to pay mortgage insurance and follow the rules that come with having a high-LTV mortgage, such as a maximum amortization period of 25 years in some cases.

High-ratio mortgages often have lower interest rates than low-ratio mortgages. Since high-ratio mortgages are insured, lenders are therefore more willing to offer lower rates for these loans mortgages than they are for uninsured low-ratio mortgages.