1. What is LTV?
Loan to value (LTV) is a ratio comparing the mortgage loan amount requested to the appraised property value or purchase price. The resulting percentage is a risk indicator for lenders when determining the borrower’s ability to repay the loan.
Most residential lenders have determined that an 80% loan to value (LTV) will segregate high-risk, and low-risk borrowers. Any loan exceeding 80% the purchase price is considered high-risk. But high-risk doesn’t mean the mortgagor is unable to receive funding. Instead, the borrower will qualify for a high-ratio, insured loan as an alternative to a conventional, uninsured loan.
Majority of residential creditors will lend a high-ratio, insured loan up to 95% LTV with a minimum down payment of 5%.
2. High-Ratio LTV = Mortgage Default Insurance
The Canadian Bank Act states that all residential mortgages exceeding an 80% LTV must be insured by either Genworth Financial Canada, Canada Guaranty, or CMHC (Canada Mortgage and Housing Corporation). The coverage is called mortgage default insurance. The insurance premium is paid for by the borrower but is solely for the lender’s protection in the event that the borrower defaults on the loan. The cost of the premium is primarily based on the LTV but other factors may contribute.