Many choose to make Sudbury their home and invest in properties in the region. With local attractions, a laid-back lifestyle, and surrounded by natural beauty, there are many compelling reasons to reside in the Sudbury area.
As a Sudbury homeowner looking to take advantage of the equity in your property, or a first-time buyer looking to profit from the robust Ontario housing market it is important to know what lenders are looking for when approving first and second mortgage loans.
It is also important that a Sudbury homeowner or borrower knows just how lenders calculate the amount of mortgage loan that they feel comfortable lending out. Many factors are taken into consideration by various Ontario lenders including the overall risk assessment of a given loan.
Many Sudbury homeowners may also not be fully aware that there are different classifications of Ontario-based lenders available to calculate mortgage loan amounts depending on the overall financial picture and credit standing of the Ontario homeowner. Lenders fall into three broad categories including:
- A lenders,
- B lenders
- C lenders.
A lenders are represented by the banks and larger lenders, B lenders are represented by credit unions and trust companies, while C lenders are made up of individual or groups of private lenders.
A lenders (the banks) impose strict lending criteria. Exemplary credit, full-time yearly income, and additional assets will generally be the norm when banks determine mortgage eligibility. Trust companies and credit unions may not demand such high credit scores, however, there are still designated criteria that must be met to obtain mortgage financing.
If an Ontario homeowner has damaged credit or reduced income there exist private lenders (C lenders) who can negotiate private secured mortgage financing by assessing other criteria including the location of your home, existing equity in your home, and the current appraised value of your home.
Why Do Lenders Calculate Loan-To-Value (LTV)?
To profit from such a robust real estate market, it is imperative to have a mortgage approved. Lenders across the Province can lend towards different types of mortgages including first (or primary) mortgages as well as different types of second mortgages on leveraged properties such as Home Equity Loans, Home Equity Lines of Credit (HELOC), home renovation loans, or even bridge loans to provide gap financing between mortgages. When approaching a lender different requirements need to be met.
Borrowing is a very involved process and as such lenders are looking to several different criteria when determining overall loan eligibility. In the process of assessing a borrower’s ability to carry a loan, lenders are always trying to determine as best they can the degree of risk that any given loan will carry.
Lending is based on assessing risk. To mitigate risk, lenders will determine best they can that the money will be there to repay the loan. All Ontario lenders will calculate what is called the Loan-To-Value (LTV) to best access risk.
What is LTV?
It is beneficial to be clear on the exact meaning of the term that helps form the basis of decisions that mortgage brokers and lenders use to determine the risk of each particular mortgage loan.
The term Loan-To-Value represents the ratio of the first mortgage amount of the real property’s total appraised value. The equation breaks down as literally loan value (requested mortgage amount) divided by the appraised value (the value of the property in question.)
Equation: Loan/Value= LTV
The standard Loan to Value ratio on mortgage loans that the banks and major lenders prefer is Seventy-Five to Eighty percent LTV. Some banks ( A lenders) can occasionally lend up to Ninety or even Ninety-Five percent of the total appraised value ( 90% LTV or 95% LTV). This is deemed, however a high-risk LTV ratio and carries with it added risk. To loan out a high-risk mortgage, a lender will require substantial additional assets, exemplary credit, and an easily proven yearly salary.
To illustrate how LTV is calculated for a principal loan amount with an 80% LTV the numbers will look like this:
The value is 400,000
The down payment is 80,000
The loan request should be 320,000
This represents eighty percent financing (Eighty percent loan to value)
The banks rely on an 80% LTV on the bulk of the mortgage loans that they approve based on the acceptable risk that this LTV carries. Eighty percent LTV is also preferred by the banks because there is no need to ask for mortgage insurance through the Canadian and Housing Mortgage Corporation when a borrower can put down 20% of the cost of loan upfront (or ask for 80% financing representing 80% LTV).
If a homeowner is looking to take out a second mortgage on a property then most lenders will not want to exceed 75% LTV for these types of loans. The risk inherent in a second mortgage is already greater. The risk relates to default or property arrears. If the first mortgage on the same property were to go into default, it can affect the homeowner’s ability to pay the second mortgage payments and the arrears on the first mortgage must be paid off first.
When calculating LTV on second mortgage loans, a lender, including private lenders will assess the current appraised value of the home against what equity is built in the home. A down payment would not be applicable in this loan arrangement.
Private lenders will also want to see at least 25% existing equity in the home to comfortably lend out mortgage financing on any second mortgage type. For second mortgage requests, the appraised value and degree of equity are the major determinants in final loan amounts.
Degree of Risk relative to LTV
90% and above LTV- Considered very high risk and therefore a premium may be charged on to help mitigate risk.
80% LTV– Standard LTV preference which makes any additional mortgage insurance through CMHC not necessary.
65% to 75% LTV- Considered to be low risk by a potential lender and the need for additional assets to leverage loans is not necessary
Less than 65% LTV– This LTV is very low risk and considered by most lenders to be very secure. The homeowner is borrowing less against the value of the property and there will be no need for extra collateral or interest rate premiums.
Ultimately it is up to the discretion of an individual lender when determining what LTV he/she is comfortable with. If, for example, it is demonstrated that a borrower has considerable assets other than the home to leverage a high LTV loan against then a borrower may lend above 80% LTV. Conversely, if there is some doubt as to the homeowner’s ability to pay back a loan then a lower LTV will be calculated to offset potential risk for the lender.
Mortgage Broker Store and Private Secured Mortgage Options
If your credit has been damaged or income may have been reduced, private lending options are widely available for an Ontario homeowner. A private lender will be calculating the LTV on a secured private loan option.
These lenders will assess the property location when determining mortgage loan approval along with existing equity and will not lend out over 75% LTV. Private mortgage loans will be short-term loans (generally 1 to 3-year terms) and will be negotiated more quickly than with other Ontario lenders.
Mortgage Broker Store can help you achieve your mortgage goals. We have access to a broad network of private lenders in Sudbury and throughout the Province who can negotiate various private mortgage loan options depending on your unique set of financial circumstances. Don’t hesitate to contact us at your convenience to secure your mortgage goals.