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What Is Loan-to-Value Ratio?
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What Is Loan-to-Value Ratio?

by programmerAugust 7, 2015

The loan-to-value (LTV) ratio, also known as the margin of finance is a calculation used to estimate how much you owe compared to your asset’s current market value. It is usually used to evaluate the risk in a mortgage loan.

In most cases, the appraised value is the same as the selling price, but the bank will request for an official appraisal anyway. Here’s how the calculation works:

Loan to value ratio = Mortgage Amount / Appraised Value of the Property

So lets say the current appraised value of market value of your home is RM500,000 and your outstanding balance on the mortgage is RM150,000. Your LTV ratio is:

RM150,000 / RM500,000 = 30%

Also consider the following scenario:

Kamal wants to buy a house for RM300,000. Because of a good credit history, his lender sets a maximum LTV of 90%. Based on the calculation above, Kamal’s maximum mortgage loan will be RM270,000. The remaining RM30,000 must be paid by Kamal himself.

For first time buyers, the LTV is usually quite high because you might not have a lot of money to put down as deposit.

Loan To Value Ratio

Why Is Loan To Value Ratio Is Important?

Before lenders provide you with a home loan, they need to determine how much to lend as not to lend more than the property’s value. Generally, borrowers with lower LTV ratio have a better chance of qualifying for lower mortgage interest rate, compared to those who have higher LTV ratios.

This is because if the borrowers have lower LTV, it means they have more equity in their homes, and are less likely to default on their mortgage. To the lenders, this is considered less risky. And even if the borrowers defaulted, the chances of selling the home in foreclosure is higher to recover the balance owed for the mortgage.

Conclusion

Buyers with a good understanding of how LTV works will make better financing decions thus save money. Your credit score is one of the most important impact on your home financing options.

So how does your credit history looks like and do you always repay your loan on time? Because, ultimately, if your credit score looks bad, it may not matter what your LTV is.

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