Real Estate

Learn to Calculate Your Loan-to-Value Ratio Today

Learn to Calculate Your Loan-to-Value Ratio Today
Written by
  • Tvine Donabedian
| 28 April 2023
Reviewed, 31 August 2023

Table of contents

    What is Loan-to-Value (LTV)?

    Loan-to-Value (LTV) is a ratio calculated as the mortgage amount you require over the value of the home you want to purchase – expressed as a percent. Since a higher loan-to-value ratio can be considered riskier, lenders use this ratio to determine whether you need to purchase high ratio default mortgage loan insurance. 

    The LTV ratio may also impact the rates you qualify for since it determines whether your mortgage will be considered a high or low ratio mortgage. Your LTV ratio will be evaluated whenever you buy a home, renew or refinance a mortgage, or add a home equity line of credit (HELOC) to your mortgage.

    Learn how to calculate Loan-to-Value (LTV)

    To calculate your LTV, divide the mortgage amount by the property’s value. If you are currently searching for a home – the mortgage amount would be the home’s purchase price minus the amount you put down as a downpayment. You would use the home’s purchase price as the property value. Your lender will consider the lower of the appraised value or purchase price as the property valuation for calculating your LTV ratio for the purposes of considering mortgage default insurance.

    If you are refinancing with your current lender or switching to a new lender, you may be required to complete an appraisal to determine the home’s current value. The appraised value would then be used as the property’s value in the calculation, and you would use the balance remaining on your mortgage as the mortgage amount.

    Here’s A Simple, Sample Calculation of LTV Ratio

    The chart below outlines the LTV ratio for each downpayment scenario when purchasing a $500,000 home. 

    Purchase Price Downpayment (%) Downpayment ($) LTV Ratio
    $500,000 5%  $25,000 95%
    $500,000 10%  $50,000 90%
    $500,000 15% $75,000 85%
    $500,000 20% $100,000 80%

    You can determine the LTV for any purchase price using the following calculation: 

    (Purchase Price – Downpayment) /  Purchase Price

    For example, you want to purchase a $700,000 home with a $75,000 downpayment. You would then calculate your LTV ratio as follows:

    ($700,000 – $75,000) / $700,000

    $625,000 / $700,000

    = 0.89 or 89%

    In this scenario, your LTV ratio would be 89%. 

    Using the same purchase price of $700,000, say you want to double your downpayment and instead put down $150,000. You would then calculate your LTV as follows: 

    ($700,000 – $150,000) / $700,000

    $550,000 / $700,000

    = 0.785 or rounded up to 79%

    In this scenario, your LTV would be 79%.

    Using an LTV calculator is another way to calculate your loan-to-value ratio easily.

    What Are High Ratio Mortgages?

    Your mortgage is considered a high ratio mortgage when you put less than 20% down as a downpayment. This means your LTV ratio is more than 80%. 

    When you have a high ratio mortgage, you will be required to purchase mortgage default insurance since it offers the lender additional security by protecting them if you default on your loan. Defaulting on your mortgage implies that you’re no longer able to make your mortgage payments. Mortgage default insurance is required if you put down between 5% and 19.99% as a downpayment. 

    One benefit of having a high ratio mortgage is that you will qualify for lower interest rates. Since the mortgage is insured, it lowers the risk to the lender. As a result, you will get a lower interest rate when compared to the rates you may be offered on a low ratio mortgage. High ratio mortgages are insured by government-backed default insurance from CMHC.

    High ratio mortgages also have limitations like fewer financing options, 25-year maximum amortization, and the subject property’s purchase price must be less than $1,000,000. Additionally, you cannot refinance into a high ratio situation since most lenders want an LTV of less than 80% before refinancing, as default insurance is no longer available when refinancing. 

    Having an LTV above 80% means you will have a high ratio mortgage which could limit your options for financing and purchase price. Though this option may have the added benefit of being offered lower interest rates, you will need to purchase mortgage default insurance which could eliminate any potential cost savings of having a lower interest rate offered. Unless, of course, you decide to pay the high ratio default insurance premium in cash instead of adding it to your mortgage.

    What Are Low Ratio Mortgages?

    Your mortgage is considered a low ratio mortgage when you put 20% or more down as a downpayment. This means your LTV ratio is 80% or below. You are not required to purchase mortgage default insurance when you have a low ratio mortgage. 

    The benefits of having a low ratio mortgage include the ability to increase your amortization to 30 years on the prime side (or higher on the non-prime lending side), fewer limitations on the purchase price (depending on the lender and location of the property), and more financing options. 

    Low ratio mortgages may come with higher interest rates. Additionally, the lending criteria are usually up to the lender since you may need a higher credit score, among other things, when qualifying for a low ratio mortgage. 

    Having an LTV below 80% will open up more options in terms of financing and will allow you to explore homes with higher purchase prices since the limitations on low ratio mortgages are much less strict. Though you may not be offered the lowest interest rates on this type of mortgage, you do not need to purchase mortgage default insurance, so there is a better potential for cost savings. 

    Frequently Asked Questions

    What is the Maximum Loan-to-Value?

    The maximum loan-to-value ratio in Canada is 95% on purchases up to $500,000. 

    For purchases above $500,000, you are required to put a minimum of 5% downpayment on the first $500,000 and a minimum of 10% downpayment on the remaining amount.

    What is the maximum Loan-to-Value for a HELOC?

    Home equity line of credit, also known as a secured line of credit or HELOC(s) within your collateral charge mortgage, is limited to 65% LTV of the lower of the purchase price or appraised property value. 

    However, the actual mortgage registered on your title can go up to 80% LTV of the lower of the purchase price or the appraised value. These limitations apply based on the subject property value and when your mortgage was first funded or transferred to your current lender. 

    What is the maximum Loan-to-Value for a Refinance?

    The maximum LTV for a refinance is 80%. 

    Final Thoughts

    Loan-to-value (LTV) is a key ratio for lenders when determining the types of mortgage financing you could qualify for. This simple calculation is something all homeowners should be aware of as it will help you better understand the available mortgage rates and the benefits and drawbacks to consider when assessing your options to choose between a high or low ratio mortgage. 

    It’s always best to speak with a mortgage expert to provide more information on mortgage financing and how your LTV ratio may impact your choices.