Let’s workout the loan-to-value ratio
Loan-to-value – or LTV as it is sometimes known – compares the size of a house loan to the value of the house. It is particularly important when applying for a mortgage, as it can be used to calculate interest rates and other terms. A lower ratio can attract a lower interest rate, as the lender considers that they are taking on less risk. On the other hand, a lender may decide not to approve a loan if it is too big relative to the property’s value.
The LTV can be calculated by first subtracting the home deposit from the house price to work out the size of the loan. Then the loan is divided by the house price (the value) to get the ratio. For a €200,000 home with a €50,000 deposit, the loan size is €150,000 and the LTV is 75%.
How much do I want to borrow?
Lenders will have limits on the size of mortgages –limits sometimes governed by industry rules. As the video tutorial Can I afford to buy a property? says banks in developed countries will typically lend 3 to 4 times a mortgagee’s gross annual salary. But what a borrower can borrow and what they want to borrow don’t have to be the same. On occasions, borrowing less than the maximum offered might be better for a mortgage holder, as it might cut repayment time, reduce interest charged and be a better fit with their lifestyle.
Can I cope financially if my circumstances change?
Because paying off a mortgage can take decades, it can pay for individuals to think about how their financial situation might change over the years. Consider asking a series of ”what ifs” – such as what if I lost my job, started a family, launched a business? Perhaps ask whether the scenarios are likely to have an impact on the ability to payback a mortgage and if the answers alter borrowing intentions.
And don’t forget that buying real estate carries investment risk. House prices can go down as well as up.