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What Is Loan to Value Ratio and Why Does It Matter?
- Danielle Burton
- Jul 1
- 10 min read
Whether you're applying for a mortgage, refinancing an auto loan, or exploring lines of credit, understanding your loan to value ratio, or LTV, is essential for making informed decisions. This simple yet powerful metric plays a key role in how mortgage lenders and financial institutions assess your risk level and determine which mortgage programs or loan options you may qualify for.
Your LTV compares the loan amount, whether a car loan, home mortgage, or personal loan, to the appraised or market value of the asset you’re using as collateral. It helps paint a clearer picture of your financial profile, especially when evaluating higher-risk borrowers. A low LTV often leads to better rates, lower loan payments, and broader financing options. On the flip side, a high LTV may suggest a common situation of limited equity, which can lead to additional costs, such as mortgage insurance or restricted lending terms.
In this blog, we’ll break down how LTV is calculated, how it relates to different types of mortgages, and why it matters in both high- and low-equity scenarios. While this article is for informational purposes, it can help you better understand your standing and prepare for smarter borrowing decisions in today’s market.
Let’s dive in and take control of your financing strategy.
Road Map:
Understanding the Basics: What LTV Really Means
Loan to Value Ratio—commonly abbreviated as LTV—is a financial term used by lenders to assess how much of a loan you're asking for compared to the actual value of the asset you're securing it against. In simpler terms,
Tells lenders how much of the asset's value is being financed, directly impacting how risky the loan is for them.
LTV is expressed as a percentage and calculated with a straightforward formula:
LTV = (Loan Amount ÷ Appraised Value of Asset) × 100
For example, if you're looking to borrow $20,000 to finance a vehicle worth $25,000, your LTV would be 80%:
(20,000 ÷ 25,000) × 100 = 80%
This means you're financing 80% of the vehicle's value, and your down payment or equity covers the remaining 20%.
Understanding LTV is important because lenders use it to decide:
Whether to approve your loan application
What interest rate to offer you
If additional conditions, like insurance or a co-signer, are required
Generally speaking, the lower your LTV, the less risk the lender assumes, making you a more attractive borrower. Conversely, a higher LTV means you’re financing more of the asset’s value, which can lead to higher interest rates, additional fees, or even loan denial.
By understanding your loan-to-value ratio upfront, you can negotiate terms, plan your financing, and make informed borrowing decisions.
How Lenders Use Loan-to-Value Ratio to Assess Risk
When you apply for a loan—whether it’s for a car, home, or refinance—lenders don’t just look at your credit score or income. They also closely evaluate your loan-to-value (LTV) ratio to gauge how risky the loan is from their perspective.
At its core, LTV helps lenders understand how much equity or security is tied to the loan. The higher the LTV, the less equity you have in the asset, and the more risk the lender takes. If you default on the loan, the lender may struggle to recover their money, especially if the asset's value drops or if resale is difficult.
Here’s how different LTV levels are typically viewed:
Low LTV (e.g., 60-80%): Seen as low risk. The borrower has a significant investment in the asset, making them less likely to walk away from the loan. This often results in lower interest rates and better loan terms.
Moderate LTV (e.g., 80-90%): Acceptable in many cases, especially if the borrower has good credit and steady income. You may still qualify for decent terms, though lenders may be more cautious.
High LTV (90% or higher): Considered high risk. The lender may worry about being able to recover the loan amount if things go wrong. This could lead to higher interest rates, the need for loan insurance, or even outright rejection of the application.
For example, in auto refinancing, a lender will look at your car's current value versus the remaining loan balance. If the vehicle has depreciated significantly or you're rolling negative equity into the new loan, your LTV could be too high, making it harder to qualify.
Ultimately, lenders use the loan-to-value ratio to strike a balance between profitability and protection. It’s a vital part of their decision-making process, and understanding it can help you position yourself as a stronger borrower.
Why a Lower LTV Can Save You Money
A lower loan-to-value (LTV) ratio doesn’t just make you a more attractive borrower to lenders—it can also lead to actual savings over the life of your loan. Here’s why:
When your LTV is low, it means you’re borrowing less money relative to the asset's value. This reduces the lender’s risk, and lenders reward lower-risk borrowers in several ways:
1. Lower Interest Rates
Lenders typically offer their best interest rates to borrowers with lower LTVs. That’s because they’re more confident you’ll repay the loan, and in the rare case you don’t, they’ll have an easier time recouping the asset’s value. Even a small reduction in your interest rate can add up to thousands of dollars saved over the term of your loan.
2. No Need for Loan Insurance
In some cases—especially with home or auto loans—a high LTV may require you to purchase loan protection insurance, such as mortgage default insurance or GAP coverage. These added costs don’t reduce your principal but protect the lender. A lower LTV often means you can avoid these extra expenses altogether.
3. More Negotiating Power
With a lower LTV, you’re seen as a strong, low-risk borrower. This gives you leverage to negotiate better terms, like reduced fees, longer payment options, or more flexible loan structures.
4. Better Approval Odds
Not only can a lower LTV save you money, but it also increases your chances of getting approved in the first place, especially if your credit score or income isn’t perfect. Lenders may be more willing to work with you if the LTV is in their comfort zone.
Real Example:
Let’s say you’re refinancing a car worth $25,000. If you owe only $15,000, your LTV is 60%. Compared to someone with an LTV of 95%, you’re more likely to get approved, enjoy a lower rate, and avoid unnecessary insurance, saving money every step of the way.
Simply put, a lower LTV can lead to real savings. From reduced interest rates and lower fees to more favourable loan terms, understanding how your LTV affects borrowing costs—and working to improve it—can make a noticeable difference to your bottom line.
How to Calculate Your Loan-to-Value Ratio
Knowing your loan-to-value ratio (LTV) can help you figure out where you stand before you apply for a loan—and it’s surprisingly easy to calculate.
What’s the Formula?
The basic formula looks like this:
LTV = (Loan Amount ÷ Value of the Asset) × 100
Let’s break it down:
Loan Amount is how much money you’re borrowing (or how much you still owe if you're refinancing).
Value of the Asset is what the item you're borrowing against is worth, like a car or house.
Then, divide the loan amount by the asset value and multiply by 100 to get a percentage.
Example:
Let’s say you want to refinance your car loan.
Your car is worth $20,000
You still owe $16,000 on your loan
Plug those into the formula:
LTV = (16,000 ÷ 20,000) × 100 = 80%
That means your loan-to-value ratio is 80%, which most lenders consider pretty solid.
Why It Matters:
The LTV gives lenders a quick snapshot of how much equity you have in the asset. The lower your LTV, the more of the car (or home) you actually "own," and the less risky it is for the lender.
An LTV of 100% means you’re borrowing the full value of the asset. Anything above 100%? You owe more than it’s worth—something lenders call “negative equity.” That’s a red flag for most banks.
Quick Tips:
Use the appraised value (not what you paid) when calculating LTV—it reflects the current market worth.
If you’re refinancing, check how much you still owe on your current loan—that’s your loan amount.
LTV applies to more than just cars—it’s also used for homes, boats, and other high-value items.
In short, calculating your loan-to-value ratio is easy and gives you a huge advantage when planning your loan or refinance. Remember: lower is better, and a strong LTV can open the door to better rates, more options, and bigger savings.
Why Your Loan-to-Value Ratio Could Be the Deciding Factor
When applying for a loan—especially for a car, home, or refinancing—lenders look at a few big things: your credit score, income, and loan-to-value ratio (LTV). And believe it or not, that LTV number could be the one factor that makes or breaks your loan approval.
Here’s Why It Matters So Much:
The loan-to-value ratio shows how much of the asset’s value is financed by the loan. It tells lenders how much skin you have in the game. If you’re borrowing most (or all) of the value, your LTV is high, which signals higher risk for the lender.
On the other hand, a lower LTV shows that you’re contributing a bigger down payment or have built up equity over time. That makes you a less risky borrower, which lenders like. A good LTV can sometimes compensate for other weak points in your application, like average credit or limited income.
Real-World Example:
Let’s say two people are applying for an auto refinance:
Person A owes $18,000 on a car worth $20,000. LTV = 90%
Person B owes $12,000 on a car worth $20,000. LTV = 60%
Even if both have similar credit scores, Person B is more likely to get approved, and will probably qualify for better interest rates and terms. Why? Because the lender knows they’re taking on less risk.
When LTV Becomes the Dealbreaker:
If your LTV is too high (usually above 100%), lenders may decline the application. That means you owe more than the asset is worth, also known as being “underwater.”
Some lenders have strict LTV cutoffs. For example, they might only approve auto loans up to 130% LTV. Go above that, and it’s a hard no, no matter how great your credit is.
Bottom Line:
Your loan-to-value ratio is more than just a number—it’s a key part of how lenders decide whether to work with you and what kind of deal they’ll offer. A strong LTV can unlock better loan terms, lower interest rates, and higher chances of approval. A weak one? It could be the reason you’re turned down.
Before you apply, take a few minutes to calculate your LTV. Knowing where you stand could be the deciding factor in getting the deal you want.
Conclusion: Why LTV Deserves Your Attention
Understanding your loan-to-value ratio (LTV) isn’t just a financial technicality—it’s a critical tool that shapes how mortgage lenders and other institutions evaluate your financial profile. Whether you're applying for a new mortgage program, refinancing a loan, or comparing different types of mortgages, your LTV plays a central role in determining approval, loan payments, and even the additional costs you might face as a higher-risk borrower.
Calculated by comparing your loan principal or current balance to the appraised value or purchase price of the asset, LTV offers a clearer picture of your risk level from a lender’s perspective. A lower LTV often signals greater borrower equity and can unlock more favourable terms—lower interest rates, reduced monthly costs, and access to more flexible lines of credit. A high LTV, on the other hand, can lead to limited financing options and additional costs, particularly in common situations where the outstanding loan is close to or exceeds the asset’s value.
Fortunately, your LTV isn’t fixed. By making an extra payment, reducing your loan amount, or increasing your down payment upfront, you can actively improve your LTV and strengthen your financial standing. That can make a big difference, especially when lenders assess your file alongside other factors like income, credit history, and overall risk.
Bottom line: Know your numbers. While this blog is for informational purposes, understanding how your LTV interacts with your overall financial profile empowers you to make smarter, more informed decisions—and puts you in a stronger position when navigating the borrowing process.
Frequently Asked Questions (FAQ)
What is a loan to value ratio (LTV)?
LTV is a percentage that compares a loan amount to the value of the asset being financed. It’s calculated by dividing the loan amount by the appraised value of the asset, then multiplying by 100.
Why is LTV important to lenders?
Lenders use LTV to assess risk. A lower LTV means you’re borrowing less compared to the asset’s value, making you a lower-risk borrower. A higher LTV may lead to higher interest rates, more fees, or loan denial.
Why is LTV important to lenders?
Lenders use LTV to assess risk. A lower LTV means you’re borrowing less compared to the asset’s value, making you a lower-risk borrower. A higher LTV may lead to higher interest rates, more fees, or loan denial.
How do I calculate my LTV?
Use this formula:
LTV = (Loan Amount ÷ Asset Value) × 100
Example: If you’re borrowing $15,000 for a car worth $20,000, your LTV is 75%.
What is considered a “good” LTV?
A “good” LTV varies by lender and loan type, but generally:
Under 80% = Strong
80–90% = Acceptable
Above 90% = Higher risk
Over 100% = Negative equity (you owe more than it’s worth)
How can a lower LTV save me money?
Lower LTVs often lead to:
Lower interest rates
No need for extra loan insurance
Better approval odds
More negotiating power with lenders
Can I improve my LTV before applying?
Yes! You can improve your LTV by:
Making a larger down payment
Paying down your current loan
Choosing a less expensive asset
Waiting until your asset appreciates in value
Can I get approved with a high LTV?
It’s possible, but you may face higher rates or stricter terms. Some lenders cap LTV ratios depending on the loan type. If your LTV is too high, you might be asked to provide a co-signer or purchase insurance.
Important Note: This article and its resources are purely for informational use. They do not reflect the offerings of specific companies or lenders. Our goal is to provide knowledge and insights for better financial decision-making. We recommend conducting in-depth research and seeking professional advice before making any financial decisions. SafeLend Canada, while not a lender, collaborates with various lenders to assist clients in refinancing their auto loans.
