Loan To Value Guidelines

Loan To Value Guidelines

What is the Loan to Value Ratio? 

This is the requested loan amount expressed as a percentage of the purchase price. Commonly used by banks and lending institutions, it is regarded as a tool to assess the level of risk. 

It is used for various types of loans, such as home and auto loans. 

For Jack, applying for a home loan from his bank is a process that he is realising is much more time-consuming and extensive than he realised. He now understands that there are a range of factors considered in the process of deciding. 

So if Jack wants to purchase a house worth R150 000 with the aim of borrowing R130 000, then the LTV ratio is R130 000 to R150 000, which is 87%.  This essentially means that Jack seeks to borrow the majority of what the house is worth. If he is unable to pay, the bank will have more costs to cover, so it could possibly reject his application.  

A higher LTV ratio indicates a red flag for lenders due to it meaning that they will be carrying more risk. 

Lending 100% or more is too much of a risk for lenders, which is why they prefer that a deposit be paid. 

The 80% threshold is often used by banks to decide the level of risk. So if Jack saves more money towards his deposit, then he will be regarded as a more favourable borrower. 

Low Loan to value ratios typically enable lenders to consider high-risk borrowers. Their affordability is assessed as less of a risk. Their deposit is considered proof that they are not a high risk.

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