What Is Loan-To-Value Ratio: What You Need to Know

Jan 28, 2024 By Susan Kelly

To determine how much risk a lender is taking, they look at the loan-to-value (LTV) ratio. As long as the loan is half the amount of the item you want to buy, People who get loans with high loan-to-value ratios may need to buy mortgage insurance from the lender to cover the risk that comes with the loan. The insurance that protects customers who purchase homes is called PMI (private mortgage insurance), and it's called that because it's for people who buy homes. Let us explore what is loan-to-value ratio.

How Loan-to-Value Ratios Work

If you get more money from a lender, you have a bigger LTV ratio, so you have more money. Because they're giving you that money, they're taking a bigger risk. It's usually a bad sign when the lender thinks you're a terrible risk:

  • To get a loan now it's a lot harder
  • Because of the interest, you might have to pay more money in the long run
  • You may have to pay extra costs, like mortgage insurance, when you buy a house, but you might not have to pay them all

A loan secured by something is likely the case when you figure out how much money you can borrow. People who want to buy a house can get a lien on the house to pay for the loan. If you don't pay your debts on time, there is a process called "foreclosure" that can happen. Many things can happen to your car loan if you don't pay.

How Do You Determine Loan-to-Value Ratio?

The value of the thing that's securing the loan helps you figure out how much money you can get. Suppose you want to buy a house that is worth $100,000. To buy a house, you'll need to get $80,000 in loans. You have $20,000 to put down. There is a lot of money in your loan, so your LTV ratio would be 80 percent. $80,000 divided by $100,000 is 0.80 or 80 percent.

Acceptable LTV Ratios

Most of the time, the magic number for home loans is about 80 percent. Most of the time, you'll have to pay for PMI (private mortgage insurance) to defend your creditor if you rent upwards of 80 percent of the home's value. When you get below 80 percent LTV, you may be able to cancel the insurance. That's an extra cost. Another significant number is 97 percent. A few lenders will let you buy a home with just 3% down, but you'll have to pay mortgage insurance for the rest of the loan. This is called mortgage insurance.

If you get a car loan, your LTV ratio will likely go up, so you'll have more debt. Limits or maximums can be put in place by lenders. They can change your rate based on how large your Loan-to-value ratio is and how much money you have in your account. Sometimes, you can get a loan with a bigger loan-to-value ratio than 100%. This is because cars can lose value more quickly than other assets, like stocks.

The Less LVR, The Better

As a rule, a lower LVR means less risk from the lender's point of view. If you have a low LVR, you may also be better off because it means you'll be off to the best possible start when you buy your own home. The first time you buy a house, if your LVR is low, you will have more equity in it.

What Happens When Your LVR Is Above 80%?

Many people say that when it comes to LVR, things start to change when they reach 80%. There could be extra costs if your LVR goes above 80%. People who get a loan above 79.99% of the value of their home may have to pay for Lenders Mortgage Insurance (LMI). If you don't pay your home loan and the house is sold, and there isn't enough money to pay off the loan, the lender is protected. If you get insurance, you'll have to pay for it.

Before deciding if LMI is suitable for you, make sure you know what it is. Then, think about what else might work for you.

Boundaries of LTV Ratios

They aren't an exact science. They're more of a thought than a fact. Getting a loan doesn't depend on how high your LTV ratio is. If your LTV ratio is close to that percentage, you're more likely to get one than if it is far away from that percentage.

Related Articles