Did you know that the average loan-to-value ratio in Canada was 58% (as of the second quarter of 2021)? So, what does that mean for you?
The loan-to-value (or LTV) ratio represents the mortgage line as a percentage of the total appraised value of a property.
For reference, 100% financing means you’ve borrowed everything (which for our intents and purposes, is extremely rare) and 0% means you don’t need a mortgage since you’ve paid for your home outright. So if you purchased a home for $500K with a downpayment of $25K (i.e. 5% down), then the relative to what your home is worth (ie. home value is 500K, down payment is $25K (min. 5%), the LTV is then 95% since that’s how much of the purchase required financing.
As a rule of thumb, a good loan-to-value ratio should be no greater than 80%. Once you get an LTV higher than 80%, this usually means higher borrowing costs, private mortgage insurance, etc.
- LTV of 80% or less → You will likely have access to financing from big banks, monoline, alternative, and private lenders
- LTV of 81-95% → You will likely have access to financing from big banks, monoline lenders on the A side, and some private lenders (LTVs above 95% are usually not considered)
Myth: A borrower with less than 20% down, who doesn’t qualify with their bank, can qualify with an alternative lender.
Fact: No they can’t. A federally regulated alternative lender cannot exceed 80% LTV (including a second mortgage). If you have less than 20% down, you have to qualify with a lender who uses mortgage default insurance or deal with a private lender. There is no in-between.
Let’s explore this further through a recent exchange. A realtor reached out to send a referral who had been turned down at their bank and was hoping to get their client hooked up with an alternative lender. Right on! So how much do they have for a down payment? The realtor informs us that they only have 5% down but are willing to pay a higher interest rate.
Unfortunately, it just doesn’t work like that. Alternative lenders can only start lending if we have at least 20% as a down payment (or 80% LTV)… we can’t just go with an alternative lender and pay a higher rate. With less than 20% down, we can only look at lenders who work with default insurers like CMHC. It’s the cheapest money, but it’s the most regulated.
At 20% down, we can work with pretty much any lender (big banks, alternative lenders, private lenders, etc.). For the realtor’s clients, since they’d already been turned down with less than 20% down, we needed to re-work the deal to be able to work with lenders or go the private route (which can be costly). In LTV cases like this, where you’re in that in-between space, we can help source more lenders and adjust things to ensure more options.
Contact the Kyle Miller Mortgage Agent team to learn more about lenders and loan-to-value ratios. We’ll provide you with different options so you get the best deal possible!
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