ASKROSS Decodes Mortgage Lingo: Loan to Value and Hi-Ratio

Since there is sometimes no way around using industry jargon, here I decode two bits of Mortgage Lingo that could certainly use a little explanation.

Dear Ross,
What do you mean when you say 80% LTV?

Yes, this is a classic use of jargon, and I am guilty of it myself sometimes. Technobabble!

80% LTV means 80% loan to value — that is, the percentage of your home’s purchase price that is mortgage; ergo you have a 20% down payment.

So if you are buying a $500,000 home with $100,000 down payment, your required mortgage will be exactly $400,000.

That is exactly 80% of your purchase price. In this case, mortgage brokers and lenders will say this application has an 80% loan to value, or LTV.

But Ross,
What do you mean when you call a mortgage hi-ratio?

Anytime a mortgage borrower puts up less than 20% down payment, we call this a “hi-ratio” mortgage. This means the mortgage amount, as a percentage of the cost of the home, is high. The Loan to Value ratio will be greater than 80%.

For homes costing under $500,000, the borrower can put up as little as 5% down payment, making that a 95% LTV mortgage.

Borrowers with less than 20% down payment must purchase default insurance — commonly referred to as “CMHC insurance”. CMHC is short for Canada Mortgage Housing Corporation, a branch of the federal government.

CMHC is not a monopoly, however. There are two other mortgage insurers – Genworth Canada and Canada Guaranty. Most lenders align to one or two of these three.

So when this insurance is purchased, there is no repayment risk to your mortgage lender. No matter what happens — even if you do a runner, they WILL get paid.

The burning question…
Why do many alternative lenders limit the amount they will lend to 65% LTV? 

Typically it’s one of two reasons.

  1. Because either the applicants’ credit history is so poor they are considered a poor lending risk.
  1. The property might be in a rural, or lightly populated area, where it is harder to effect a quick sale of a property.

    In both cases, the mortgage lender wants to leave a good chunk of equity in the property — so that if the borrowers do not meet their obligations, the lender can safely recoup their loan when they go to sell the property.

A lender might max out the loan to value ratio at 65% or even lower for other reasons — for example:

  • Maybe the applicant has low income
  • Perhaps they are collecting disability payments
  • They rely heavily on support payments
  • The applicant is a business owner with an income that is difficult to verify. 

I find a little explanation goes a long way with industry terms. Hope that explains things, but of course questions are always welcome.

 

Financial Literacy Leader of the Year Award 2017 Crest
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