Loan-to-Value (LTV)
Candlefocus EditorThe advantage of having a lower LTV ratio is that lenders are more likely to grant a loan for a lower rate or with more favourable terms. Generally speaking, financial institutions view LTVs at or below 80% as favourable and will offer the borrower a competitive loan rate.
In some cases, lenders may grant a loan with an LTV ratio of more than 80%. This is sometimes seen when a borrower only has a small down payment and requires PMI (Private Mortgage Insurance), a policy that protects the lender in case the borrower defaults. However, when lending with an LTV at or above 80%, lenders will often charge a higher interest rate.
In conclusion, Loan-to-Value is a very important factor when evaluating a borrower's creditworthiness and serves as a benchmark for loan pricing. The lower the LTV ratio, the more favourable the loan rate, but often requires a large down payment. Borrowers with access to gift funds or other loan programs may qualify for mortgages with lower down payments, but will likely pay higher interest rates. When considering a loan, it's important to keep in mind how the LTV ratio will affect the rate and terms.