It is the relationship between the value of the home and the size of the loan. A lower loan-to-value ratio may mean that the bank gives you a lower interest rate on the mortgage loan. The loan ratio you have can also affect how much you have to repay each month.
How do you calculate the loan-to-value ratio?
To calculate your loan-to-value ratio, you divide your mortgage with the market value of the home. For example, if you have a condominium worth $ 2,000,000 and your home loan is $ 1,000,000, the loan-to-value ratio is 50% (1,000,000 / 2,000,000).
Why does the loan-to-value ratio matter?
The larger the loan you have on your home in relation to its value, the less additional loan space you have on the home. You can borrow at most 85% of the value of the property. In the eyes of the bank, it is less risky to lend to you if you have a lower loan-to-value ratio. The loan is taken with your home as collateral, therefore the interest rate can be lower when the loan-to-value ratio is lower.
If you suspect that your home has increased in value, it may be worth letting brokers do a new valuation. It can then use the new valuation as an argument for lower interest rates when negotiating with the bank.
There are a few laws and regulations regarding the loan-to-value ratio that you should check before you loan to the home:
The mortgage ceiling is a limitation on what loan ratio you can have the most. Since the mortgage ceiling was introduced, you can borrow at most 85% of the value of the home in the mortgage. The last 15% is your cash contribution. So your loan-to-value ratio may be at most 85%. The mortgage ceiling applies to all mortgages taken out from October 1, 2010. Note that this differs from the down payment, which is usually 10% of the price and is paid in connection with the signing of a contract.
The repayment requirement works so that if the loan-to-value ratio is above 70%, the mortgage loan must be repaid at least 2% of what was borrowed from the beginning each year. When the loan-to-value ratio is less than 70%, the loan must be repaid by at least 1% per annum until the loan-to-value ratio is below 50%.
The requirement applies to loans taken from June 1, 2016 and the purpose is to reduce the loan-to-value ratio in Sweden in terms of mortgages.
Should one strive for as low a loan-to-value ratio as possible?
When you have the opportunity to decide for yourself how much to pay off, it may be worth thinking through the matter properly. It may be that you should rather invest the money in some other savings instead of amortizing. It is not possible to give a general answer to the question whether to amortize or save otherwise.
In order for it to be financially viable to save instead of repayment, the return on what you save must be higher than the interest cost on your mortgage. You should also weigh in if you need a buffer in your account.
If you have several other expensive small loans and credits, it is wise to collect these into a larger and cheaper loan. We at Astro Finance are happy to help you if you want to collect your old loans in a new low-interest loan.
Benefits of comparing the banks with Astro Finance
All banks specialize in different types of customers. It is therefore not possible to say that one bank is better than another when it comes to loans. This is why it is important to compare different loan offers to find which bank suits you best!
If you as a private individual go to several different banks to compare the terms, they each take credit information on you. This affects your credit rating and can impair your ability to get a really low interest rate. If you choose to compare with Astro Finance, only one credit report is made. The service is completely free of charge and you do not commit to anything when you make a comparison. Instead, Astro Finance gets paid directly by the bank or lender when we help them get a new satisfied customer.