How to calculate your loan-to-value (LTV) ratio

Figuring out your LTV ratio can help you predict how much mortgage you’ll qualify for. But it’s far from a guarantee.

What is a loan-to-value ratio?

A loan-to-value (LTV) ratio is the size of a mortgage loan compared to the value of a property expressed as a percentage. The higher your down payment is, the lower your LTV ratio will be.

How to calculate your loan-to-value ratio

You can find your LTV ratio by dividing the amount you’ll need to borrow to purchase a property by the property’s value.

For example, if you buy a property for $500,000 and need a loan amount of $400,000 to purchase it, your LTV will be 0.80, or 80% when expressed as a percentage.

What is the LTV ratio used for?

LTV ratios are important when it comes to getting a mortgage. Generally, the lower the ratio, the lower the risk you present to your lender.

Lower LTV ratios often qualify for cheaper interest rates. Generally, a loan of 80% or less is recommended, as borrowing more leads to more fees and charges and the possibility of higher interest rates.

If you have an LTV ratio above 80%, which means you put less than 20% down, you’ll likely need to take out private mortgage insurance (PMI).

Use your LTV ratio to determine your price range

You can use your down payment amount and your goal LTV ratio to help determine how much mortgage you can afford.

For example, let’s assume that you’ve saved up $35,000 to use as a down payment and you’re hoping to take out a mortgage with an LTV ratio that’s 80% or lower so you can avoid having to pay for private mortgage insurance. An 80% LTV ratio requires you to put 20% down, so that $35,000 needs to be 20% of the total cost of the home.

(Home price) x 0.20 = $35,000

$35,000 ÷ 0.20 = $175,000

In this example, you’ll need to choose a home that costs $175,000 or less to have an LTV ratio of 80% or higher. That would leave you with a mortgage of $140,000. You can use a mortgage calculator to figure out how much you’d need to pay each month for a mortgage of that size.

Is my LTV ratio permanent?

No. As you pay off your mortgage, your loan-to-value ratio decreased. Once you own at least 20% of your home, you can ask your lender to cancel your private mortgage insurance.

If you decide to refinance your home or take out a second mortgage in the future, your LTV ratio will be recalculated.

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Bottom line

Your loan-to-value ratio affects your ability to qualify for mortgages and how much your monthly payment will be. But a lot of other factors affect your mortgage, too — like your income, your credit score and the mortgage provider you use. Compare mortgage providers to get a better idea of what you’ll pay for a home.

Frequently asked questions

• What does LTV 80 mean?

  This is usually used to refer to a home loan which has a maximum LTV of 80%. Borrowing over this LTV might not be allowed with this type of home loan or may come with a higher interest rate. Also note that borrowing over 80% LTV in usually comes with private mortgage insurance (PMI). This is a fee that you’ll have to pay to cover your lender in the event that you default on your loan. You can often cancel your PMI if your LTV falls below 80%.

• What is the difference between LTV ratio and LVR?

  These both mean the same thing. LTV ratio is used more often in the US, while LVR is a common term in other countries, like Australia. You’ll also see some lender shorten LTV ratio to just LTV.

• How is the property's value determined?

  If you’re buying a new home, the lender may use the property’s sale price or the most recent appraisal. If you’re refinancing or taking out a second mortgage, you’ll usually need to have the home appraised.