When lending real estate with a mortgage – banks use many different tricks that will secure the given investment. One such indicator is LTV. It significantly affects the final cost of the loan. What about this enigmatic abbreviation?
Banks providing mortgage clearly defines the methods of commitment. It is intended only to finance the purchase of real estate, which is also the main mortgage security. Therefore, the LTV indicator, ie Loan To Value is the main parameter that determines the interest rate on the loan. Simply put, it is a bank conversion factor that allows you to assess the credit risk of a particular investment.
LTV is very often confused with an indicator that measures the level of own contribution. Unfortunately, these are two separate concepts! Yes, the amount of funds for the purchase of real estate is undoubtedly reflected in LTV – but it cannot be synonymous with it. By developing the abbreviation “Loan To Value”, we think literally: “Credit to Value”. Therefore, the indicator shows – how the amount of money borrowed from the bank looks like up to the real value of the credited property. The lower the LTV, the more attractive the loan price!
Currently, on the financial market it is very difficult to equal 100% LTV – and so the sum of the loan equal to the value of the investment. Why? This is the result of the fact that banks have ceased to grant loans that fully cover the cost of buying a mortgage. And that means having to make your own contribution. Also read: 8 ideas on how to get your own contribution!
In order to calculate LTV for a specific investment, it is necessary to know the amount of the loan – ie the amount borrowed from the bank, as well as the value of the mortgage, which will be used as collateral for the entire loan. It is best to understand how the indicator works on a specific example. Namely – if the property is worth 250 thousand dollars and the bank grants a loan for 250,000 dollars, LTV is 100%. However, if the loan amounts to 200 thousand. by calculating LTV – we divide the loan amount by the value of the property and multiply it by 100%:
LTV ratio: 200 00: 250,000 = 0.8 x 100% = 80%
To sum up: m and higher Loan To Value, the higher the cost of the loan and the more likely that the lender will require additional security, eg. In the form of insurance, a one-time commission or margin. Therefore, the customer with a higher own deposit has a much better negotiating situation and a better chance of obtaining an attractive credit offer. From January 2017, on the basis of the “Recommendation S” adopted by the Polish Financial Supervision Authority – the client applying for a mortgage must have at least a 20% contribution of real estate value. This is to confirm the credibility and stable financial position of the potential borrower.
Interestingly, during the mortgage LTV may change! It may be the result of repayment of a portion of capital, changes in the value of real estate, as well as in the case of foreign currency loans – exchange rate fluctuations. A decrease in the LTV ratio may occur when taking loans in dollars. Because repayment of some funds means a decrease in the level of debt. Paradoxically, with LTV currency loans and the amount of credit itself can increase. After all, it is burdened with additional currency risk, ie a change in the exchange rate.
The times when banks shaped the LTV ratio at a level exceeding 100% and granted loans without own contribution have gone forever … This means that we will no longer receive such an obligation that will cover 100% the costs of buying a given property. We will not find a loan with a rate higher than 80%. An exception may only be the proposals of some banking institutions, which, in exchange for a minimum 20% own contribution, offer redemption, so-called a safe ceiling, additional insurance for the missing amount. However, due to many threats resulting from the mismatch of the credit amount to the client’s financial situation – we can expect a tightening of lenders policy.
That is why it is also worth remembering that not only additional cash will contribute to the improvement of credit conditions. Equally important is the property that we own, as well as the property in which we currently live, a construction plot or a family home. The only condition that must be met is no charge and acceptance by the bank. After all – each time it is necessary to thoroughly analyze and examine all the pros and cons. After all, a flat or house made available as part of a loan will provide its security for several long years!