Loan-to-Value (LTV) is a ratio between the amount of a loan over the value of what you are purchasing. More specifically, LTV is used for mortgages where it represents the ratio between your mortgage amount over the value of the home you are financing. Your LTV ratio is important, as it can mean that you are required to purchase mortgage insurance and can also affect your mortgage rates.
To calculate LTV, you would divide the mortgage amount over the property value. If you are purchasing a home, the property value would be the purchasing price of the home, while the mortgage amount would be the purchasing price subtracted by the amount of your down payment. If you are refinancing or switching mortgage lenders, you may be required to have a home appraisal to get an up-to-date home value. Appraisal fees are typically paid by the borrower.
LTV is used by mortgage lenders to assess risk when deciding whether or not to extend credit to you. A high LTV ratio would be riskier for a mortgage lender, while a low LTV ratio would be safer. This can have impacts on your mortgage approval and your mortgage interest rate.
As you pay off your mortgage, your LTV ratio will decrease. Your LTV ratio can also decrease if your property value increases. Toronto’s housing market has performed well, and only 13% of mortgages within Toronto were high-ratio mortgages in 2016. Similarly, only 10% of mortgages within Vancouver were high-ratio. In comparison, Calgary had 36% and Halifax had 45% of mortgages being high-ratio in 2016.
Likewise, your LTV ratio can increase if your property value decreases. Having a LTV ratio above 100% means that you owe more on your mortgage than what your property is worth, and is also known as “negative equity” or being “underwater” on your loan. Borrowers with underwater mortgages are more likely to default.
The maximum LTV for an uninsured mortgage is 80%, while the maximum LTV for an insured mortgage is 95%.
A low LTV ratio means that it would be more likely for your mortgage lender to recover the amount of the mortgage should you default, even if housing prices fall. A low LTV also gives you flexibility by having more equity in the home. This would allow you to take out a second mortgage or when you need to borrow against your equity, such as through a Home Equity Line of Credit (HELOC).
The Bank of Canada classifies mortgages into two types: high-ratio mortgages and low-ratio mortgages.
A home equity line of credit has a credit limit based on the value of your home. The maximum LTV for HELOCs can range from 65% up to 80%.
The maximum LTV for a refinance in Canada is 80%.
When choosing your type of mortgage in Canada, you have the option between a High or Low-ratio mortgage. High-ratio mortgages are mortgages with a LTV ratio above 80%. On new home purchases, this means that the down payment was less than 20%. Mortgage insurance is required for high-ratio mortgages, such as mortgage default insurance provided by the Canada Mortgage and Housing Corporation. CMHC insurance comes with premiums paid by the borrower. Insured mortgages are safer for the mortgage lender, and so high-ratio mortgages usually have a lower mortgage interest rate.
High-ratio mortgages have additional requirements, such as debt-service requirements (limits on payment amounts versus income), a maximum amortization period of 25 years, and a maximum home purchase price of $1 million.
Low-ratio mortgages, also known as conventional mortgages, have a down payment greater than 20%. Mortgage insurance is optional, but your mortgage lender may require you to obtain mortgage insurance as a condition to approval. There is no regulatory limit to debt-service requirements, purchasing price, and amortization period.
|High-Ratio Mortgage||Low-Ratio Mortgage|
|Loan-to-Value (LTV)||80% or more||80% or less|
|Minimum Down Payment||5% up to $500,000, then 10% after $500,000||20%|
|Maximum Purchase Price||$1 Million||No Limit|
|Maximum Amortization Period||25 Years||No Limit|
|Debt-Service Requirements||Strict Limits||No Limit|
Source: The Bank of Canada