What does Loan To Value (LTV) mean?
The loan to value (LTV) is the total mortgage amount divided by the appraised value of the home at the time of the loan.
The two types of mortgages are:
• High Ratio Mortgage: A mortgage where the loan to value is above 80%. In Canada a high ratio mortgage must be insured by one of our three mortgage insurance companies; CMHC, Canada Guarantee or Genworth. This insurance premium is paid by the borrow as part of their mortgage. Premiums are determined by the insurers and vary with the LTV ratio of the mortgage . the cost of the premium is typically passed on to the borrower" (Crawford, Meh, & Zhou, December 2013) The insurance company will pay the mortgage value to the lender should the borrower default and be unable to pay. This insurance makes a high ratio mortgage much lower risk to a lender than a conventional mortgage because whether the borrower or the insurer pays them, either way they are getting paid. As a result high ratio mortgages are offered a lower interest rate.
• Conventional Mortgage: A mortgage where the loan to value is 80% or lower. When you see a very low interest rate advertised it is almost always a high ratio mortgage rate, several people make the mistake of thinking that they can get those low rates on their conventional mortgage renewal, this is typically not the case. Conversely it seems that no one would ever want to pay an insurance premium that they didn't have to but consider this: in some cases the difference in rates offered to a high ratio mortgage will actually save you more money than the cost of the insurance. If you are purchasing a home then it is important for your Mortgage Broker to evaluate the cost difference between putting 19% down or 20% down on your purchase, the cost calculations will tell you which option will save you more money and the answer may surprise you.