What is LTV (Loan-to-Value) and why does it matter?
If you are thinking about buying a home, there are terms you will have to deal with and one of them is Loan-to-Value or LTV. Despite the pompous foreignness, it is a very simple concept and widely used in banking.
It is unlikely that when you apply for a mortgage, no bank will give you the full value of the house. The higher the borrowed amount, the higher the risk the bank takes.
For this reason, housing loans usually represent between 60% to 80% of the value of the property and this is why we have to “enter” the purchase of the house, ie pay the remaining percentage required to pay the property. .
What is LTV then?
The LTV is a ratio that corresponds to the percentage to be requested from banks regarding the value of the property. In the past, there were 120% LTVs. Nowadays, although there is 100%, banks usually set the maximum percentage of LTV between 60% to 80% of the appraisal value of the property.
In Portugal, LTV is sometimes referred to as the “guarantee financing ratio” and is calculated using the following formula:
LTV (%) = Loan Amount / Guarantee Amount
Since the value of the guarantee is, in the case of mortgage, the property purchased. If it cannot make a commitment to repay the loan, the bank can take the house and sell it later to pay off the debt.
For example, Luna and Carlitos intend to buy a property valued at 200 thousand dollars. The bank proposed to grant a credit of 120 thousand dollars. In this specific case, the calculation of the LTV is as follows:
LTV (%) = 120,000 / 200,000 dollars = 60%
How does LTV influence the cost of the loan?
It is the LTV that will define how high the risk the bank takes by lending such a large amount. Therefore, the higher the risk, the more likely the spread is to be higher.
That is, as appealing as it may be to get financing as close as possible to the appraisal value of the house, you will probably be paying more for that loan.
Still, there are several other factors to consider when applying for a home loan, and it is all these factors that should help you make a decision: interest rates, insurance included, commission amount charged, terms and associated products.
You should also consider whether it makes more sense for you to choose a fixed or variable rate and of course calculate your effort rate. Otherwise, you can only guarantee that you get the best mortgage on the market if you…