How To Calculate A Loan To Value Ratio

How To Calculate A Loan To Value Ratio

How to calculate a loan to value ratio: 

Loan amount/ Value of property or car 

The former is what you borrow. This determines how much you need to pay initially and starting equity. The estimated market value is as appraised by professionals. 

If Nthateng is looking to buy a house worth R900 000 and she is willing to pay at least R300 000 upfront, her calculated ratio of 33.3% means that the bank will only be loaning her 66.67% of the full loan.  

A figure in excess of 80% won’t work in her favour as it would mean that the bank is taking on more of a potential financial hit in case of default..  

A lower LTV results in less overall interest paid. This is because Nthateng will be settling a smaller loan portion. 

Boris is buying his first property and has saved a considerable deposit. The property is worth R800 000 and he has managed to save R160 000. This means that he has paid 20% of the entire loan value. The remaining 80% of the loan is the risk that will be taken by the bank after assessing Boris’ affordability and creditworthiness. 

If he had saved an amount slightly lower than this, it’s likely that his application would have been rejected. By contributing at least 20%, the bank considers Boris a lower risk. He is viewed as more likely to pay his loan off in full because he has covered a significant portion of it. 

Prior to applying, Boris would be wise to learn how to calculate a loan to value ratio. 

What Nthateng and Boris have in common is good financial planning because they will not only be saving more in interest payments, but they are also more likely to have greater control of how much they are paying in the long run. By being low risk clients, this also bodes well for their credit standing. 

Categories: Financial tips