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Loan-to-value ratio (LTV): What is it, Why is it important?

If you’re looking into a home equity loan, you have probably encountered the loan-to-value (LTV) ratio. This percentage provides important information to homeowners who want to borrow against their home equity, allowing them to determine the amount of money they may be able to obtain from a home equity loan.

What is loan to value? 

Represented by a percentage, the LTV ratio is the total value of the loan (or loans) compared to the total value of the asset you offer as collateral. The loan-to-value ratio is applicable not only to home equity loans but also to home equity lines of credit (HELOCs), mortgages, and vehicle financing.  

In the context of home equity loans, your property would be the asset securing the loan. In this case, the LTV would be the value of the loan you are obtaining (and any existing mortgages) compared to your house’s appraised value. 

A woman calculating her loan to value.

How to calculate loan-to-value

Before calculating your LTV ratio for your home equity loan, you’ll have to determine the value of your property. You can estimate how much your property market value is, or you can find an appraisal service that can determine it for you.  

Take the value of the loan you’re applying for and the value of existing mortgages, and then divide it by the home value. Afterwards, multiply it by 100 to get the percentage.

loan-to-value ratio explained.

An example of a home equity loan and loan to value  

If you’ve lived in your home for many years, the appraised value of your home may be different from when you first bought it. The likelihood is that the value has increased, depending on the economic  environment and home improvements.  

Property values are high particularly in BC and Ontario, with many standalone housing prices reaching a million or more.  

For example, if you have an appraised value of $1.2 million in your home and you have been diligently paying off your mortgage and only have $200,000 in outstanding mortgages. Your current loan to value ratio will be roughly 17%, which is considered a low ratio.  

Assuming you take a $200,000 loan for some home renovation and add it to your outstanding mortgage of $200,000, your total loan amount is $400,000.

loan-to-value ratio example.

Your new LTV is 33%. Based on the maximum allowable LTV of 80% for lenders, you could potentially borrow more if you need more financing for debt consolidation or other financial obligations.  

Every homeowner is in a unique mortgage and financial situation. Houses and outstanding balances will be different. Regardless of your circumstances, Alpine Credits can help you access your home equity as a loan, which can help you with your financial goals.

Low vs high LTVs 

A low LTV ratio means you’re borrowing less against your collateral asset. The lower your LTV, the more flexible repaying the loan may be for you and the lower the risk to the lender. You may also have the opportunity to borrow more if you need to.  

A higher LTV ratio does not mean an automatic denial. However, most lenders that allow for higher LTVs may also have higher interest rates, as a higher LTV typically equates to higher risk for the lender. 

Improving your loan-to-value ratio 

Though not every lender uses the ratio as a qualification standard, lenders consider lower loan-to-value ratios as more favourable. You have the ability to decrease the ratio by borrowing less, paying off more of your mortgage, or increasing the value of your property. If you do the opposite, then your LTV ratio will increase. With a lower LTV ratio, lenders are more willing to offer lower interest rates and higher loan amounts to borrowers.

Home equity loans and LTVs 

LTV ratio in home equity loans are important because it provides information to the borrower about their potential loan. Homeowners with lower ratios will be more likely to get approved and have more ideal offers, such as lower interest rates and bigger loans.  

The loan to value ratio is also helpful for homeowners considering home equity loans because the ratio shows the maximum they can borrow against their property. Most lenders wouldn’t lend to borrowers with more than 80% in LTV. As previously demonstrated, loan to value ratios are calculated by taking the total amount of the loan and dividing it by the value of the asset, which is your home.  

How you can use a home equity loan 

Home equity loans are a flexible financing solution, allowing you to use the funds for any purpose. Because they are secured loans, they have more attainable criteria than conventional loans from banks and comparatively lower interest rates compared to unsecured lenders.  

  • Credit consolidation—if you have outstanding balances from multiple credit cards, a home equity loan can help you repay them all and let you focus on just one payment a month. The interest on home equity loans is also comparatively lower than the accumulated interest from various credit lines and/or credit cards.  
  • Home renovation—you can use the house’s value to finance its makeover. Some renovations can cost up to $100,000 or more, and you can cover that cost if you have built sufficient equity in your home. 
  • Business and investment—home equity loans are an excellent option for entrepreneurs. The funding is more accessible than regular business loans because the only qualification you need to meet is the minimum amount of equity.

Getting a home equity loan with Alpine Credits 

The process to get a home equity loan is simple. You can finish the application in less than an hour, and the funds will be in your bank account within a week.  

  1. Apply online—you can complete the application within a few minutes. The only information you need to provide is your personal details and the appraised value of your house.  
  2. Wait for results—your application will be processed in less than 24 hours. Alpine Credits doesn’t use your credit history to determine your eligibility and processes applications more quickly.  
  3. Use your loan—with home equity loans being more valuable with comparatively lower interest than other financing options, you can use it to meet your financial needs.  

Alpine Credits is more focused on providing the financial support you need to achieve your goals. As long as you have paid off at least 25% of your home, you’re eligible for a home equity loan from us. Your credit score, income, or employment status do not influence the outcome of your approval.  

If you have more questions regarding home equity loans and LTV ratios, you can contact a Financial Solutions Specialist at Alpine Credits. They are experts who can discuss with you how a home equity loan can help you accomplish your aspirations. A home equity loan can be the financial solution you need. 

Apply now

Frequently asked questions

Having an 80% LTV means that your loan is worth 80% of your asset’s worth. If your asset is worth $500,000, you can have a loan worth $400,000.

Although the maximum at most lending institutions is 80%, a lower LTV is better since that’s what lenders usually prefer. Not only are you considered a more favourable borrower to the lender, but it also prevents you from having excessive financial obligations.

A mortgage loan worth 80% or more of its value is considered a high-ratio mortgage. When getting a traditional mortgage, you’re required to provide a down payment that’s at least 20% worth of the property. Providing a down payment of less than the expected amount results in a high-ratio mortgage.  

Home equity loans can also have high ratios. A high-ratio home equity loan means that the value of what you’re borrowing is more than 80% of the property value.

LTV ratios are not a required standard to meet when you’re looking for a home equity loan. Rather, you can borrow up to 75% of your home equity with Alpine Credits.

To borrowers, LTV ratios provide information and protection. When borrowers determine the value of their ratio, the percentage shows them how much they can borrow against their home equity, which can be an important financial tool.