Higher deposit, lower LTV, better home loan…
No, LTV is not teen talk or millennial code for 'Let Them Vote' or 'Live Those Values'. It's home loan speak for the loan-to-value ratio. Need to make sense of this technical term? Here's how.
There's a vital factor that homebuyers need to be aware of when they apply for a home loan, and that's the loan-to-value ratio (LTV). This little ratio can make all the difference when it comes to banks deciding whether to approve or refuse a home loan application — it's how they measure the mortgage risk.
If you're not a mathematical maestro, here's a simple way of putting it: the LTV is basically the loan amount written as a percentage of the purchase price — or as a percentage of the appraised value of the property, if this is different to the purchase price:
|Loan-to-value||=||loan amount||=||__%||OR||Loan-to-value||=||loan amount||=||__%|
|purchase price||value of property|
And here's how it works:
You want to buy a house at an asking price of R2 million. You put down a 10% deposit of R200 000, so the loan amount you need is R1.8 million.
However, if it turns out that the bank's evaluation of the property is only R1.9 million (and not R2 million), on a loan of R1.8 million, that would actually mean an LTV of 95% as far as the bank is concerned, and that could actually result in the application being turned down:
|Loan-to-value||=||R1.8 million||=||94.7%||rounded off to 95%|
All other things being equal, the higher the LTV ratio, the riskier it is for the banks (the lender) to lend you the loan amount. This doesn't automatically mean that the lender will reject your home loan application. But it may mean the banks may charge you a higher interest rate or require you to purchase insurance to protect the loan.
And that's why it's so important to put down the biggest deposit you possibly can before you decide to buy that dream home. The bigger the deposit and the lower the LTV percentage, the lower the risk to the lender — and the more attractive the loan from their point of view.
Because the more 'skin' you put into the 'game', the lower the risk of you defaulting on your loan, and the lower the likelihood of the bank having to get a debt judgment against you, or repossess the property. The lower the LTV, the more likely you are to have your home loan application approved, and the more favourable the terms will be.
Most banks are actually quite prepared to negotiate lower interest rates on low LTV applications. And if you apply for a loan through a reputable bond originator like BetterBond, we'll approach all the major banks on your behalf — we've got 20 years' worth of experience and preferential relationships with them! — to ensure that you get the best available home loan deal, with an interest rate that works best for you.
And a lower interest rate means more affordable monthly repayments, plus big savings on the total cost of your home over the lifetime of your bond. On, say, a R1.5 million bond, taken over 20 years, an interest rate that is just 0.5% lower could save you up to R120 000 over your bond term. Now that's LTV — lekker total value!