When determining the maximum mortgage amount that someone qualifies for, one of the calculations the government and the lender make is the Loan to Value ratio, or “LTV”.

How do we determine Loan to Value? This is a very simple calculation, and it is calculated by dividing the mortgage amount by the appraised value of the property being purchased or financed.

As an example, if you have a one million dollar house, and you have a mortgage of $650,000, your loan to value is calculated as follows:

$650,000 divided by $1,000,000 which is 0.65, multiplied by 100 to get a percent, gives you a loan to value of 65%.

Another example, a $436,000 mortgage on a $740,000 property, would be a LTV of:

$436,000 divided by $740,000 multiplied by 100 would be 58.9% loan to value.

LTV also affects whether you need mortgage default insurance, commonly known as CMHC financing. Mortgage Default Insurance allows someone to buy a property that they otherwise would not be able to purchase as they don’t have the required resources for a down payment.
Currently, to obtain a conventional mortgage in Canada, if your LTV is less than 80%, you do not have to have mortgage default insurance. You can increase up to 95% LTV, but you will pay a one-time mortgage default insurance fee, which is based on a percentage of the mortgage.

Stay tuned for further blogs on the various financial calculations and lingo in the mortgage world!

Written by me, Dr. Jim Graszat, mortgage agent with Dominion Lending Centres