Loan-to-value ratio calculation method

Another factor taken into consideration by the lender when analyzing a borrower is the amount of the loan compared to the value of the property. The loan-to-value ratio compares the amount of the mortgage loan to the total value of the property.

To determine the maximum amount of the loan that will be granted, the maximum percentage (the loan-to-value ratio) of the property’s market value is calculated. The market value of a property is defined as its selling price or appraised value, whichever is lower.

The loan-to-value ratio (LTV) is calculated using the following formula, and is used to determine whether the loan will be insured or conventional:
 

Loan-to-value formula LTV = (loan amount/market value) X 100
A conventional loan has an LTV of 80% or less.
An insured loan has an LTV of more than 80%.

Example 1:
Sale price of property: $420,000
Loan amount: $320,000
Loan-to-value ratio is 76.19% ($320,000/$420,000)

In this case, the loan will be conventional, since the loan-to-value ratio is lower than 80%.

Example 2:
Sale price of property: $420,000
Loan amount: $350,000
Loan-to-value ratio is 83.33% ($350,000/$420,000)

In this case, the loan will be insured, since the loan-to-value ratio is higher than 80%. In the latter case, the cost of mortgage insurance will be added to the loan.

Note: Rather than adding the insurance premium to the loan amount, some borrowers opt to pay it in cash.

In general, the maximum loan-to-value ratio permitted by law is 80% for regulated lenders such as deposit institutions and other lenders subject to the Bank Act or similar legislation. The exception to this rule is for insured loans, which may represent up to 95% of the value of the property.