Before you take out a mortgage, it is important that you already get what loan ratio you can get. This figure can be something that affects which lender it is cheapest to borrow from. The loan-to-value ratio is the part of the house purchase that you can have as the mortgage loan and where the home itself becomes collateral for the loan.
Currently, this sum is a maximum of 85% of the value. The other 15% must therefore be financed in other ways such as cash contributions and top loans. Also, it is not certain that all banks and lenders offer you as much as 85% loan-to-value ratio, but it may well be 70 – 85% depending on who you turn to.
Cheaper to borrow from someone
If a lender only offers you 75% as a loan-to-value ratio, then it may be cheaper to borrow from someone who offers you 85% but who has a slightly higher interest rate on the mortgage. The reason for this is that the mortgage loan is still so much cheaper than borrowing money in the form of a top loan, where you have no collateral for the loan and thus also clearly higher interest rates.
How high can the loan ratio be?
As we said, the maximum loan-to-value ratio is currently 85%, which is by far the largest part of the cost. However, there are a number of different factors that can affect your potential loan-to-value ratio. This is because you can borrow 85% of either the price of the home or the valuation, whichever is the lower.
If the valuation of the property falls below the price, you can only borrow against the valuation. This means that you who have bought a house that is more expensive than it is valued unfortunately can not borrow as much as you might need and then you are forced to find more money elsewhere.
If you buy a house that is worth a lot of money but for some reason you can buy cheaply, the high loan-to-value ratio will allow you to cover most of the cost. On the contrary, if you buy a house that is not worth much but for which you have to pay an expensive price. For example, if you buy a house for 2 million that the lender does not consider is worth more than 1.5 million. You can only borrow at most 85% of 1.5 million, even though you actually put 2 million on the purchase.
It is possible to get a 100% loan-to-value ratio on certain special (and very few) occasions. One of these is if a rental right is to be converted to tenant-owner. Then it can sometimes be that the cost of the condominium is much lower than the market value and then it can get very good loan-to-value ratio.
Some calculation examples for loan-to-value ratio
It is the valuation of the home or the purchase price that, together with the lender’s rules, determines what the loan-to-value ratio will be. Suppose you buy a house valued at 1.25 million and that you pay 1 million for this. If you get a loan-to-value ratio of 85%, this means that the bottom loan will guarantee 85% of the price, which means that a bottom loan of max. 850,000 USD. The remaining 15%, ie USD 150,000, must then be financed through top loan or cash payment.
If the situation is instead so that you buy a house for 1.25 million but which is only valued at 1 million and you get a loan-to-value ratio of the same 85%, the mortgage will be secured for USD 850,000 even in this situation. In this case, you would thus need to finance as much as USD 400,000 of the purchase in the form of cash payment and top loan.
Summary of the loan-to-value ratio and what to consider
When you take out a mortgage, you obviously have to consider the loan-to-value ratio as it plays quite a big role. As we wrote earlier, a higher loan-to-value ratio of a bank can do more on the total cost of the loan than the difference in interest rates does.
It is also important that the home you buy does not cost too much in relation to how much it is worth as it may mean that you have to find a clearly larger sum elsewhere than what you can get as a mortgage. This is money that you must either have saved and can pay in cash or money you can borrow elsewhere, like an expensive top loan.
How much you can get in top loans also depends on your financial situation. The bank looks at what your finances look like and determines what they think is a reasonable loan ratio for you. Check with lenders what they offer and make your choices based on how good loan terms you can get.