Unimor Capital Corporation

Tag: loan to value

  • Understanding LTV: How it Impacts Your Mortgage Eligibility

    Understanding LTV: How it Impacts Your Mortgage Eligibility

    When it comes to obtaining a mortgage, understanding the concept of Loan-to-Value (LTV) ratio is essential. The Loan-to-Value ratio is a financial metric that plays a significant role in determining your eligibility for a mortgage. This article aims to shed light on what Loan-to-Value is and how it affects your ability to secure a mortgage.

    What is Loan-to-Value Ratio?
    Loan-to-Value ratio, often referred to as LTV ratio, is a key measure used by lenders to assess the risk associated with a mortgage loan. It represents the proportion of the loan amount in relation to the appraised value or the purchase price of the property (whichever is lower). The LTV ratio is expressed as a percentage and serves as an indicator of the borrower’s equity in the property.

    Understanding the Calculation
    To calculate the Loan-to-Value ratio, you divide the loan amount by the appraised value or the purchase price (whichever is lower) of the property and multiply the result by 100 to get a percentage. For example, if you are purchasing a property valued at $300,000 and you are borrowing $240,000, the LTV ratio would be calculated as follows:

    LTV Ratio = (Loan amount / Appraised value or purchase price) x 100
    LTV Ratio = ($240,000 / $300,000) x 100
    LTV Ratio = 80%

    How LTV Ratio Affects Mortgage Eligibility
    Lenders consider the LTV ratio as a crucial factor in assessing the risk associated with a mortgage loan. A higher LTV ratio indicates a larger loan amount relative to the value of the property, which is perceived as a higher risk for lenders. Here’s how the LTV ratio affects your ability to secure a mortgage:

    1. Impact on Interest Rates: In general, a higher LTV ratio often translates to higher interest rates on the mortgage. Lenders charge higher interest rates to mitigate the increased risk associated with a higher loan amount in comparison to the property value. To secure more favorable interest rates, a lower LTV ratio is preferable.
    2. Loan Approval: Lenders have guidelines and restrictions based on the LTV ratio. While the specific thresholds may vary, a lower LTV ratio generally increases your chances of mortgage approval. Lenders are typically more comfortable lending to borrowers with a greater stake in the property, as it serves as a cushion against potential losses in case of default.
    3. Mortgage Insurance: If your LTV ratio exceeds a certain threshold (typically 80%), lenders often require you to obtain mortgage insurance. This insurance protects the lender in case of default, but it adds an additional cost to your monthly mortgage payment.
    4. Down Payment Requirements: The LTV ratio directly influences the down payment required. A lower LTV ratio means a higher equity stake in the property, thus reducing the amount you need to borrow. Consequently, a lower LTV ratio generally leads to a lower down payment requirement.

    Understanding the Loan-to-Value ratio is crucial when applying for a mortgage. The LTV ratio acts as a risk assessment tool for lenders and plays a vital role in determining your mortgage eligibility. Maintaining a lower LTV ratio not only improves your chances of approval but also provides access to more favorable interest rates and reduces the need for mortgage insurance. If you’re planning to purchase a property or refinance an existing mortgage, make sure to consider the Loan-to-Value ratio and strive to maintain a healthy balance between the loan amount and the property value.

  • How Much House Can You Afford?

    How Much House Can You Afford?

    Shop for your new home the smart way! Learn how to calculate how much house you can afford before hitting that open house or applying for a mortgage. Buying your first home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.

    The Rules of Home Affordability

    Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less.

    Your maximum mortgage payment (rule of 28): The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

    Your maximum total housing payment (rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32% of your gross monthly income. That means, for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

    Your maximum monthly debt payments (rule of 40): Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40% of your gross monthly income. In the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (i.e. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.

    This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

    How to Calculate an Affordable Mortgage

    Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average 6% interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed.

    For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.
    ($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)

    Include Your Down Payment

    Ideally, you have a down payment of at least 10%, and up to 20%, of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.

    Note: If you put less than 20% down, your mortgage lender will require you to pay mortgage insurance, which will increase your non-mortgage housing expenses and decrease how much house you can afford.

  • The New 2018 Mortgage Rules

    The New 2018 Mortgage Rules

    What are the 3 new 2018 mortgage rules?

    It’s going to get a lot harder for some home buyers to get a mortgage in 2018. That’s because the Office of the Superintendent of Financial Institutions (OSFI, Canada’s banking regulator) introduced three new rules on mortgage lending that takes effect in 2018 and the new rules will hit first-time home buyers and those thinking of refinancing their homes the hardest.

    1. Stress Test
      Starting on January 1, 2018, the OSFI has set a new minimum qualifying rate, or ‘stress test’ for all prospective home buyers, even those with a down payment of over 20%. Before the new, tougher rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Regardless of how much money you save for a down payment, if you don’t pass the new stress test, the bank won’t give you a mortgage.Under the new mortgage stress test, potential home buyers need to qualify for a mortgage at a rate that is the greater of two indicators: either 2% higher than the mortgage rate they qualified for, or the Bank of Canada’s 5 year benchmark rate, which is currently at 5.14%. Before the new stress test, home buyers or owners qualified at the rate offered by the lender. The actual mortgage payment will still be paid at the negotiated rate, but a higher calculation is used for qualifying purposes.
    2. Enhanced Loan-To-Value Measurements
      Traditional mortgage lenders (Canada’s big banks) need to ensure the Loan-To-Value (LTV) ratio remains “dynamic.” That means it needs to be adjusted to local market conditions. The OSFI insists that lenders (excluding private lenders) have internal risk management protocols in higher priced markets, like Toronto and Vancouver. A LTV ratio is a number that describes the size of a loan compared to the value of the property.Canada’s big banks use the LTV ratio to determine how risky a loan is; the higher the LTV ratio the greater the risk. For example, if property values decrease following a housing bubble, the LTV ratio could actually rise and be higher than the total value of the property. In which case, it’s quite possible that you have negative equity in the house.
    3. Restrictions Placed on Certain Arrangements to Avoid LTV Limits
      Mortgage lenders (again, this does not include private lenders) are not allowed to arrange a mortgage or other financial product with another lender that gets around the maximum LTV ratio or other limits placed on residential mortgages. If you apply for a mortgage with a LTV ratio of 80% and the lender can only approve you for 60%, in the past, the lender could partner with a second lender for the additional 20%, bundle it together to get a complete LTV loan of 80%. Traditional lenders cannot do this anymore.

    What does this mean for homebuyers and sellers?

    The three new mortgage rules that kick in as of January 1, 2018 will hurt the fastest growing segment of Canada’s mortgage market—uninsured mortgages. That’s one out of every six prospective homebuyers in the country.

    The strict stress test, which is meant to ensure borrowers can afford to pay their mortgage at a higher rate, is now being applied to all home buyers, even those with a down payment of 20% or more. Once the tests are in place, it is estimated that it could lower a family’s purchasing power by up to 21%.

    Economists say the stricter mortgage rules will also negatively impact softening housing markets across the country. It is expected the tougher mortgage rules, once fully implemented, will depress housing demand by up to 10%.

    If you’re a homebuyer and want to refinance a mortgage, the new mortgage lending rules will be a lot more difficult to negotiate.

    Should you be worried?

    If you’re a first-time home buyer, the stricter mortgage lending rules mean you might need to rent for a little longer or wait until your income increases before you can buy a home. Because the purchasing power does not go as far as it once did, first-time home buyers might need to consider something besides a detached house—a townhouse house or a condo. Or, first-time homebuyers may need to get a co-signer to qualify under the strict new rules.

    There are other options though. Keep in mind; the stricter mortgage lending rules only apply to those homebuyers looking to secure a mortgage with one of Canada’s federally regulated mortgage lenders, which does not apply to private mortgage lenders.