Ontario homeowners are in an enviable position. Not only has the real estate market proven to be very robust for all of 2020 and into the third quarter of 2021, but there are also many lending choices when contemplating mortgage financing.
Be it a first, second, or even third mortgage on an existing property, Ontario lenders are available to help homeowners with crucial decisions ranging from which type of mortgage arrangement would best suit their financing objectives to choosing from a wide array of mortgage options.
Mortgage options do exist as well for those that may have poor credit. Although the banks may not proceed with mortgage applications due to damaged credit or insufficient household income, experienced private lenders are available throughout Ontario providing short term, quickly negotiated second mortgages to homeowners with sufficient home equity.
Regardless of the lender that an Ontario homeowner approaches for mortgage financing, the process of lending is based on the same basic principle- the ability to mitigate risk. Lenders must be in the position to look at the financial criteria presented by the borrower and use various calculations to determine the level of risk inherent in a given mortgage arrangement.
One of the most important calculations that all lenders will use including banks, trust companies, and private lenders is referred to in the mortgage industry as the Loan-To-Value (LTV). Having a clear picture of how lenders come up with the LTV for a mortgage loan will help to form a firmer understanding of what lenders are looking for when determining mortgage eligibility.
What does my Loan-to-Value Ratio mean?
The term Loan-to-Value may be a familiar one to some. For lenders, the exact definition refers to the total amount of a loan that a borrower takes out compared to the appraised value of the property that the mortgage loan is secured against.
For every mortgage loan, a lender will calculate the overall LTV. Depending on the particular loan arrangement and with which type of lender an Ontario homeowner may choose, the LTV can vary.
A lender will take into account different criteria. For example, a bank's calculations for an LTV will differ when calculating a loan for a long-term amortized first mortgage as compared to a private lender who may be calculating LTV on a private second secured mortgage.
In the first case, a bank will take into account the degree of down payment a borrower can put down in the overall equation. The equation will involve the total cost of the property minus the amount of the down payment provided by the borrower:
Using the example of a bank calculating 80% LTV the numbers will look like this:
The value of the property is 400,000
The down payment provided by the borrower is 80,000
The loan request should be 320,000
The mortgage loan of 320,000 directly reflects an 80% LTV which represents lending up to 80% of the value of the property.
How to calculate a Loan-to-Value (LTV)
In the mortgage industry, there is an agreed-upon equation to calculate what the LTV will be for a given mortgage. The equation breaks down as literally loan value (requested mortgage amount) divided by the appraised value (the value of the property in question.) It is represented as:
Equation: Loan/Value= LTV
The term represents the ratio of the first mortgage amount of the real property’s total appraised value. The equation breaks down as literally loan value (requested mortgage amount) divided by the appraised value (the value of the property in question.)
When we plug in the numbers it can look like the following example:
Appraised Value- 100,000
Loan Amount- 75,000 (75 percent of the appraised value of the home)
The equation: 75,000/100,000 or Loan amount divided by the appraised value
The above equation reflects an LTV that is calculated including both first and second mortgages on the property divided by the current appraised value of the property. The appraised value of the property is the determining variable because any additional loan on a mortgaged property will be using the existing property as leverage for additional mortgage financing.
For a long-term amortized mortgage, a bank will tend to lend roughly 80% LTV. A bank may loan higher than 80% or calculate a lower LTV depending on the financial criteria presented by the borrowers.
The takeaway remains the bank's due diligence in calculating the overall risk of a given loan. The stronger the financial picture of a borrower, the less nervous a bank will be to lend at a higher LTV. Having very strong credit, substantial household income, and additional financial assets or a sizable down payment will help to increase the overall LTV.
What is the maximum Loan-to-Value?
Although an LTV of 80% remains a bank standard, in some instances, banks may lend up to Ninety, Ninety-Five (90% LTV or 95% LTV). This LTV ratio is considered a very high LTV and therefore carries with it added risk. To loan out a high-risk mortgage, a lender will again expect additional assets to secure the loan against, exemplary credit, and an easily proven yearly salary.
The primary reason an Eighty percent Loan-to-value is most often used in the mortgage industry relates to insurance. If a borrower can put down twenty percent towards financing the first mortgage, then there is no need to apply for mortgage insurance through the Canadian Housing and Mortgage Corporation (CHMC).
This mortgage insurance is an added expense for the borrower and is rolled into the overall monthly payments for the borrower. This increases the borrower’s monthly overall mortgage payments.
Private lenders will be hesitant to lend beyond 75% LTV. This is for good reason. When a borrower is looking to seek private mortgage financing, often credit and income are an issue. Private loans as such are deemed inherently higher risk loans and this is reflected in the LTV.
Generally, for an urban property in a desirable location, a private lender will lend up to 75% of the appraised value of the property (75% LTV) for any type of the second mortgage For properties in outlying areas a private lender will tend to only lend up to 60%-65% LTV contingent on the unique financial picture of the homeowner.
High-Ratio vs Low-Ratio Mortgage
To get a better idea of the LTV associated with different mortgage loans it breaks down to the following probabilities:
1. Higher than Eighty-Five Percent Loan to Value- The banks will occasionally loan out these higher-risk loans but may ask the homeowner for an added default insurance premium to pay to offset the risk associated.
2. Seventy-Five to Eighty-Percent Loan to Value- This LTV is typically associated with long-term amortized mortgages and private second mortgages for urban properties All lenders in Ontario including private lenders will loan up to 75% LTV. This is considered the standard LTV in the mortgage industry.
3. Sixty-Five to Seventy-Five Percent Loan to Value- A loan with 65% to 75% LTV is considered very secure. Demonstrated additional assets will not be required as this is deemed a lower risk for a potential lender. Private lenders will likely calculate this LTV for second mortgages associated with properties outside urban areas.
4. Less Than Sixty-Five Percent Loan to Value-This is an example of a low-risk loan to value loan and as a result, it is very secure. The homeowner is borrowing less against the value of the property and as such there will be no need for extra collateral or interest rate premiums.
Private Lenders and Secured Mortgage Options
If your credit has been damaged or income may have been reduced, private lending options are widely available for an Ontario homeowner. A private lender will be calculating the LTV on a secured private loan option just as all the other lenders in the Province.
Private lenders will look at the property location, the current state of your property, and the appraised value when determining mortgage loan approval. These mortgage loans will be short-term loans (generally 1 to 3-year terms) and will be negotiated faster than with other Ontario lenders. Interest rates on all types of private mortgages will fall between 7% and 12% with fees ranging from 3%-6% of the overall cost of the mortgage loan.
Mortgage Broker Store can help you achieve your mortgage goals. Mortgage Broker Store has access to a broad network of private lenders throughout the Province who can negotiate various private mortgage loan options depending on your unique set of financial circumstances. Don’t hesitate to contact Mortgage Broker Store at your convenience to secure your mortgage goals.