Loan-to-value measures the relationship between secured debt and the property value accepted by the lender.
It is a fundamental risk measure, but it is not a complete risk assessment.
Basic LTV formula
LTV=
Accepted property value
Mortgage amount
×100
If a property is worth $800,000 and the mortgage is $600,000:
$600,000÷$800,000=75%
The LTV is 75%.
Lending value is not always the purchase price
For a purchase, the lender will generally consider the purchase contract and its accepted valuation of the property. Where the appraisal is lower than the contract price, the lender may calculate the mortgage using the lower accepted value.
This protects the lender from advancing funds based on a price it does not consider supportable.
Worked example — Appraisal shortfall
Illustrative assumptions
Purchase price: $800,000
Intended down payment: $160,000
Intended mortgage: $640,000
Intended LTV: 80%
Appraised value: $760,000
Illustrative lender maximum: 80% of accepted value
Maximum mortgage based on the appraisal:
$760,000×80%=$608,000
Mortgage originally expected:
$640,000
Additional shortfall:
$640,000−$608,000=$32,000
The borrower now requires:
$160,000+$32,000=$192,000
before considering other closing costs.
Another way to see the problem is to calculate the intended mortgage against the appraisal:
$640,000÷$760,000=84.21%
The requested mortgage would no longer be an 80% LTV loan against the lender’s accepted value.
This does not mean that every shortfall can be solved by increasing the down payment. The additional funds must still be documented, and borrowing them can affect qualification.
First-mortgage and combined LTV
A second mortgage must be assessed in relation to all secured debt ahead of or alongside it.
Illustrative assumptions
Property value: $900,000
Existing first mortgage: $500,000
Proposed second mortgage: $100,000
First-mortgage LTV:
$500,000÷$900,000=55.56%
Combined LTV:
($500,000+$100,000)÷$900,000=66.67%
The second mortgage is only $100,000, but the combined secured exposure is $600,000.
A second lender also considers that the first mortgage generally has priority. Enforcement costs, arrears and other amounts can reduce the value available to the second lender.
OSFI expects federally regulated lenders to account for combined secured lending and prohibits structures intended to circumvent the lender’s LTV limits.
LTV and equity are not identical
A property worth $900,000 with $600,000 in secured debt appears to have $300,000 in gross equity.
That does not mean the owner can borrow the full $300,000.
Potential deductions and limits include:
Lender maximum LTV
Existing mortgage
Penalty
Legal and discharge costs
Appraisal costs
Property tax or condominium arrears
Other liens
Selling costs where sale is the exit
Marketability discount
Private-lender fees and interest reserves
Minimum net-equity requirements
Gross equity is a mathematical difference. Borrowable equity is a lender decision.
Why equal LTVs are not equal risks
Consider two 70% LTV applications:
Property A
Standard detached home
Established Mississauga neighbourhood
Broad buyer pool
Legal residential use
Good condition
Reliable comparable sales
Property B
Remote location
Highly customized construction
Mixed or uncertain use
Deferred maintenance
Few comparable sales
Limited buyer pool
The mathematical LTV is the same. The probability, timing and cost of recovering the loan through sale may be very different.
OSFI expects lenders to adjust their valuation and LTV approaches for property type, location, use, market conditions and other factors affecting marketability. Higher-risk and illiquid properties call for more conservative valuation.
Property characteristics lenders may examine
Location
Urban, suburban, rural or remote
Size and depth of the resale market
Economic concentration
Recent price volatility
Exposure to environmental or natural hazards
Availability of comparable sales
Property type
Detached, semi-detached or townhouse
Condominium
Multi-unit residential
Rural acreage
Cottage or recreational
Leasehold
Co-operative
Mixed-use
Commercial
Unique or luxury property
Condition
Deferred maintenance
Structural concerns
Fire or water damage
Incomplete construction
Renovations
Insurability
Remaining economic life
Legal use and zoning
Legal number of units
Permits
Zoning compliance
Work orders
Commercial activity
Short-term rental use
Unpermitted additions
Occupancy
Owner-occupied
Family-occupied
Tenanted
Vacant
Short-term rental
Student or rooming-house use
A representation about occupancy must be accurate. Misstating an investment property as owner-occupied can constitute mortgage fraud.
Residential versus commercial LTV
Residential lenders frequently begin with borrower income and debt-service ratios, then assess the property as security.
Commercial lenders often place greater weight on:
Net operating income
Debt-service coverage
Lease quality
Vacancy
Property type
Market capitalization rates
Environmental risk
Borrower experience
Net worth and liquidity
A 70% residential LTV and a 70% commercial LTV are therefore not interchangeable.
Private-lender LTV considerations
Private lenders may place greater emphasis on property value and exit strategy than an institutional lender, but that does not mean they ignore the borrower.
A private lender may consider:
Mortgage position
Combined LTV
Location
Property condition
Saleability
Current arrears
Property taxes
Legal stage
Interest reserve
Exit plan
Cost and time of enforcement
A high appraisal does not eliminate risk if the property would take a long time to sell or if transaction and enforcement costs would consume the apparent equity.
Scope boundary
The detailed appraisal process appears in Chapter 20. Private-lender LTV policies and costs belong in the Ultimate Private Mortgage Guide. Commercial valuation belongs in the Commercial Mortgage Handbook.
Explore this subject further