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What is a Loan-To-Value Ratio ...

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.

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Why Should I Consider a Privat...

Owning your property does come with certain advantages beyond the obvious appeal of being able to call it your own. One advantage that not all Toronto homeowners may have considered is the ability to tap into existing equity in your home. This hard-earned equity will be able to free up funds to put towards other short-term financial goals and priorities.

The reasons behind accessing existing home equity vary. Perhaps you would like to take care of some of those pressing home repairs that you have put on the back burner during the Covid pandemic. After sitting in your back garden during the summer months you may have determined landscaping that may provide for a backyard oasis and further increase the value of your Toronto property.

A Toronto homeowner may have household debts outside housing and mortgage monthly costs that are difficult to cover. A cash infusion from home equity in the form of a second mortgage loan would help to both pay down high-interest debt and merge multiple debt payments into one manageable monthly payment, enabling all monthly housing costs to be covered more easily.

Certainly, during the prolonged pandemic, the Toronto housing market has flourished. Outperforming the years leading up to the pandemic. Toronto homeowners are in the enviable position of seeing significant property gains.

According to Ontario Real Estate Association (OREA), the year-over-year increase in the Toronto housing market in August 2021 as compared to the same month in 2020 represents 22.6%. These impressive gains put the average price of a Toronto single detached property at $1,086,625.

These numbers are very encouraging for Toronto homeowners. What if you have damaged credit? Banks, as well as trust companies and credit unions, will be able to negotiate a second mortgage based on available home equity, creditworthiness, and degree of household income.

If a Toronto homeowner has poor credit, limited income, or substantial household debt it may be best to turn to a Toronto-based private lender. Private lenders will be able to offer short-term financial help while giving sufficient time to repair credit for any other loan applications down the mortgage road.

What Do I Need to Be Able to Qualify for a Private Lender?

When considering a private mortgage loan, it is always best to be prepared and bring with you as much documentation as necessary to help facilitate the private loan application process.

It is also beneficial to know what exactly a private lender will be basing his/her mortgage loan approval on. Although poor credit and limited household income will not be a barrier to private mortgage financing, a private lender will be assessing:

The degree of the existing equity in your property
The recent appraised value of your property
The current state of your property
The location of your property
Taking into consideration any underlying structural issues such as foundation problems or water damage
Calculating the Loan-To-Value (LTV) on your property based on your home appraisal and the above criteria

A private lender will need to see at least $70,000 of the existing equity after the requested mortgage is placed, in order to approve the request. This equity is what will constitute your mortgage financing, enabling you to use these funds for short-term economic priorities.

When determining the Loan to Value (LTV) on your property a private lender will scrutinize the most recent appraisal on your property. For any private second mortgage options, a private lender will comfortably lend up to 75% of the current value of your home. Lending beyond 75% of the appraised value of your home is deemed a high-risk loan and a private lender will try to mitigate risk.

This 75% LTV will be most applicable to urban properties in desirable locations. For properties outside the city, a private lender will tend to loan up to 65% LTV to help reduce any potential risk for the lender when recouping mortgage funds.

So, what should a Toronto homeowner bring to a meeting with a private lender? As preparation is the key to private mortgage success it is best to have all your ducks in a row when meeting with a potential private lender which includes:

Look into a pre-approval if you are applying for a first mortgage
Gather all relevant paperwork
Know your current credit score
Pull and research a recent credit report
Research private lending options in your area
Arrange to sit down with a private lender
Know what type of loan you feel would address your short-term financial needs
Bring a recent appraisal and proof of the degree of equity in your home
Any relevant employment documentation.

Poor credit will not deny a Toronto homeowner a private second mortgage, however, It is advisable to do whatever you can to improve your credit score. Consider working to pay down high-interest debt if you can. Continually make an effort to pay any liability payment on time and in full if possible. The better your credit ultimately will give you the most favorable terms on your final secured mortgage agreement.

Mortgage rates on all types of private mortgage loans are generally between 7% to 12% with any associated fees ranging from 3% to 6% of the loan’s total cost. Although these rates may be higher than the banks will charge, they enable a homeowner/borrower more flexibility, are negotiated faster than traditional mortgage financing, and are structured as short-term loans (usually between 1 -3 years).

How Do I Find a Private Mortgage Lender?

After deciding to pursue the route of private mortgage financing, the pressing concern for many is just how do I find a reputable private lender? Answering this question boils down to a few trusted methods including:

Private lender referrals from mortgage brokers in the industry
Researching private lending options in your area
From those homeowners/borrowers who can personally recommend the services of a given private lender

A mortgage broker can help negotiate private mortgage financing directly depending on your unique financial circumstances and reasons for seeking private mortgage financing. Additionally, brokers will be able to direct you towards private lenders throughout Toronto and the surrounding GTA who can negotiate a private mortgage loan with terms that will reflect your financial picture.

Private Mortgage Lenders vs. Banks

When comparing mortgage financing through the banks and private lenders the required criteria demanded by the banks simply are not obtainable for some Toronto homeowners.

The mortgage approval criteria for the banks are based primarily on strong credit and proven substantial household income. If credit is an issue, a Toronto homeowner will not be able to pass the rigid mortgage stress tests that the banks routinely put borrowers through before approving mortgage loans.

Beyond income and credit, there are other compelling reasons to consider private mortgage financing including:

The ability of private lenders to offer short-term mortgage financing
The ability of private lenders to negotiate the terms of a private mortgage loan quickly. Approval can take as little as 1-4 days with the loan process completed in a few short weeks
The process is very straightforward

Private Lender Fees

Typically, the interest rates associated with most private mortgage loans tend to range between 7% to 12% depending on the financial picture presented by a given homeowner. Most private loans only require the homeowner to pay interest on the mortgage during the mortgage term.

There will also be fees associated with private loans. These fees will cover both the lender's fees and broker fees to process a private loan option. In general, the fees charged by most private lenders will be between 3% and 6% of the total cost of the mortgage loan.

Mortgage Broker Store Will Help Direct You Towards Private Mortgage Options

If you are a Toronto homeowner/borrower who would like to obtain mortgage financing, don’t let credit issues stand in your way of taking out hard-earned equity from your property to pay for needed expenses.

Mortgage Broker Store has access to a broad network of private lenders in the Toronto area with specialized knowledge of the private mortgage sector. A private lender will be able to sit down with you and discuss your options directly which will help you achieve your mortgage goals.

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What Exactly is Bridge Financing?

There are many compelling reasons why Ontario homeowners/borrowers may reach out for private mortgage financing. Private lenders are in increasingly higher demand as the banks are continually demanding stringent mortgage criteria while tightening their mortgage rules. Mortgage stress tests are becoming more difficult to pass for some Ontario homeowners.

Many hopeful Ontario homeowners/borrowers are simply unable to meet this rigid criterion. Maybe an Ontario homeowner’s credit has been damaged. By the same token, maybe a borrower/homeowner has non-traditional income that may be difficult for the banks to calculate such as freelance, contract-based or self-employed.

Financial concerns will still arise for an Ontario homeowner regardless of credit issues and the degree or type of household income. Many homeowners are in search of short-term mortgage financing to help ease immediate financial priorities.?

An Ontario private lender will be able to look at criteria beyond simply credit and income to provide immediate access to home equity for an Ontario homeowner. These lenders will also be able to offer a broad range of second mortgage options. One such option is bridge financing. Bridge financing options are offered by banks and private lenders. Offered on a very short-term basis, this type of second mortgage loan option can provide a financing option for existing Ontario homeowners.

As the Ontario housing market continues to hold strong well into the third quarter of 2021, it may be the right time to let your equity work for you in the form of a bridge loan to take advantage of a robust real estate market.?

According to the August Toronto Housing Report, although housing prices are not increasing at the same rate, they were in the second quarter of 2020, the numbers are still strong. The average price of a single detached property in Toronto remains at $1 million. Housing sales in August 2020 are also still up from the same time last year.

What is a Bridge Loan?

Before defining what, a bridge loan is, it is important to keep in mind that this type of loan is one of several second loan options available to an Ontario homeowner. Each loan will require tapping into existing home equity. Depending on the lender a homeowner/borrower chooses, the terms of the loan as well as the criteria for approval will vary.

A bank will require a credit score of at least 650 and will prefer to see substantial and relatively easy to calculate household income to approve bridge financing. A private lender will be able to base bridge financing on the degree of equity in your home and the appraised value of your property. Second mortgage loan types can include:

Home Renovation loans
Debt consolidation loans

Home equity loans
Home Equity Line of Credit (HELOC)
A second mortgage

How does a bridge loan differ from other mortgage options? The main features of a bridge loan that makes this type of second mortgage financing unique stems from its term length and purpose.?

Loosely defined, bridge loans represent very short-term loans (usually 1 to 3 months) in which a homeowner borrows against the existing equity in their home or property.?

The motivation to take out a bridge loan usually stems from the need to access considerable equity to purchase new property. The loan is primarily used to secure the funds for a downpayment on a new property before closing on the current property.

How does a Bridge Loan Work??

A Bridge loan can be referred to as a financing bridge. It can be viewed as a financial crossing between the sale of your current property and closing on a new purchase. It can, in other words, help fill the short-term financial gap. To fully benefit from bridge financing, there should be sufficient equity in your current home.

During the term of the bridge loan, only the interest is paid. Once the new property is secured then the bridge loan will be paid in full from the sale of the first home. The main objective for accessing funds in the short term is to pay for a new property before the sale of the home is completed.?

Bridge loans will be calculated differently depending on if you are applying through a bank or an established private lender. The banks will calculate the difference between the deposit you have to put down on a house and the bridge financing you are requesting.??

A bank will assess a homeowner's credit score and income when determining bridge financing. Typically, a bank will lend up to $200,000 for usually a three-month term.

Rather than focusing primarily on credit score and salary, a private lender will base a bridge loan on the available equity and appraisal of an Ontario homeowner's property. A private lender will:

Assess the degree of equity you may have. To secure a private bridge loan a homeowner needs to demonstrate at least $70,000 of the existing equity after the requested mortgage is placed, to approve the request.
Focus on the general overall condition of your property
Focus on the location of your property
Assess if there are any ongoing problems with the property such as foundation problems or water damage

Will calculate the Loan-To-Value (LTV) on your home. For most urban properties in desirable locations, a private lender will loan up to 75% LTV which represents 75% of the appraised value of your property. For properties in outlying locations, the LTV will most likely be 65% to help mitigate any risk for the private lender to recoup their funds.

The loan will be short-term, similar to the banks (typically 1-6 months) The corresponding mortgage rates will be higher the closer a homeowner gets to the Maximum LTV on their respective loan request. A private lender will be able to process a bridge loan quickly and it represents a straightforward process.

Potential Pros of Bridge Loans?

Bridge financing is a fairly quick way to obtain mortgage financing,?
A bridge loan will take away the worry of having to move twice. Once before the sale of the property and again into the new property.
There is no need to sell your property first before buying another by tapping into existing equity.
Will provide the opportunity to put more funds towards a larger down payment.
Obtaining a bridge loan through a private lender will be achievable even with poor credit if the banks have turned down a homeowner.

Some Possible Cons?

Higher Interest rates associated with bridge loans

Higher fees as compared to other traditional mortgage options

Might have to cover the costs for an appraisal on your property when applying for bridge financing.?

The overall cost of the loan will be higher if negotiated through a bank as compared to a long-term amortized mortgage.

Bridge Loan Fees?

Fees will be higher for both banks and private lenders when it comes to bridging financing as compared to long-term amortized mortgages. A bank will typically charge the interest rate of Prime plus usually 2 or 3% for typically a three-month term.?

A private lender will typically charge slightly higher rates, ranging from 7 to 12% interest on a bridge loan depending on the borrower's financial criteria. The fees associated with all privately secured mortgage financing tend to be between 3% and 6% of the total cost of the loan.

Mortgage Broker Store and Second Mortgage Options

With access to a broad network of well-established and experienced private lenders across Ontario, Mortgage Broker Store will be able to connect an interested homeowner to private lenders to discuss various privately second mortgage loan options, including possible bridge financing.

Mortgage Broker Store is also able to negotiate private financing directly, depending on your specific financial objectives. Poor credit and non-traditional income need not be a barrier to obtaining a bridge loan or any other loan to help pay off any pressing monthly liabilities. Don’t hesitate to contact Mortgage Broker Store at your convenience to discuss the best options to suit your unique financial circumstances.

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