Calculation example for a loan-to-value loan
You want to buy a house for $ 330,000. The mortgage lending value is 90% of it, i.e. $ 297,000. You have 160,000 dollars available as equity. So if you want to take out house financing in the amount of $ 170,000, the loan-to-value ratio (the share of external financing) is 57.24%. In other words, just over 57% of the property is then mortgaged.
The loan-to-value ratio has direct consequences for the interest you have to pay on your home loan. The banks have various internal limits that are based on the loan-to-value ratio. With a loan-to-value ratio of up to 60%, banks usually give the most attractive interest. If you need a higher financing volume, the interest rate increases due to the greater risk. The lower the equity, the more difficult it will be to obtain affordable construction finance.
Calculation formula: How to calculate the loan-to-value ratio
Do you want to prepare your financing plan for a property purchase and calculate the loan expiration? Then you can use the following formula:
The calculation is based on the above example with the following key data:
- The outside capital amounts to $ 170,000
- The purchase price for the property is $ 330,000
- The mortgage lending value is $ 297,000 (90% of the purchase price)
Using the formula, the calculation method is created:
When making a mortgage comparison, note how the mortgage lending value is calculated for the respective lender. The mortgage lending value is not everywhere at 90% of the purchase price. It can also be 80%. This leads to an increase in the loan-to-value ratio, which has a negative impact on loan conditions.
Why is the mortgage lending limit 60%?
The mortgage lending limit is 60% because, according to the Pfandbrief Act, banks can secure real estate loans up to this limit. This means that if the borrower is unable to pay, the bank’s claims are met first.
Some banks conclude house financing but also with a loan expiration up to 80%. With very few exceptions, a loan-to-value ratio of over 100% is possible. In this case, the property will be fully leveraged without equity. However, this is only possible if the customer has a very good credit rating and high income. And the interest rates are correspondingly high.