This LTV calculator figures out your loan to value percentage by considering the value of your property and the mortgage amount. There is in depth information about this indicator and its formula below the form.
How does this LTV calculator work?
The loan to value which is often abbreviated as LTV is a financial indicator calculated as a ratio between the property value and the mortgage amount secured on it. It is used by lenders/reditors when analyzing whether a borrower is qualifying for a new mortgage or not.
The algorithm behind this LTV calculator applies the fomula explained here:
LTV = (Mortgage amount / Property value) * 100.
In terms of risk assessment, a high loan to value ratio indicates a high risk that the debtor may not afford to pay back the debt in due time. So, by evaluating the LTV lenders try to figure out whether the borrower can afford a new loan and if yes which are the costs the borrower has to pay depending on his risk profile. A smaller LTV ratio conducts to a smaller cost of the mortgage, while a higher LTV percentage will determine higher costs associated with the mortgage as it will have an impact on the interest rate and on the closing costs.
In practice, creditors approve new mortgage loan in case the LTV ratio of the borrower is maximum 75%.
Why does it matter?
- The lower the LTV ratio is the better, as you will qualify for lower mortgage rates than borrowers with higher LTVs.
- A lower LTV is considered less risky which means the borrower is less likely to default on his mortgage, and even this takes place the lenders would have the chance to recover their money by selling the property.
- Depending on how high is the LTV ratio lenders may require you to pay for private mortgage insurance (PMI), which is an important expense that comes with the loan.
- The lower the LTV percent is the higher the chances to borrow more money than in case of higher ratio.
Example of a loan to value ratio calculation.
For a property estimated to worth £200,000 if the owner already has a mortgage/debt secured with it of £ 50,000 then the loan to value ratio is 25.00%. Thus there are high chances that the lender will consider the holder of the property is eligible to qualify for a new loan.24 Mar, 2015