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(December 5, 2021)

Intro (pre-amble): up to 10:56 mark of podcast (Loan-to-value ratios mean everything | watch succession and yellowstone | list your home on thursday’s | mortgage qualification = guilty until proven innocent | interest rates)

How to catch a break in Canadian mortgage qualification:

The criteria for mortgage qualification involves fairly deep analysis of your personal income generation, your history of handling mainly unsecured consumer credit sources (like credit cards, lines of credit, car loans) and lastly, the amount of skin you have in the game – the down payment, or if refinancing, the current equity stake in your property. But the main driver and gatekeeper to all of the qualification tiers is the loan-to-value ratio (aka LTV). The loan-to-value ratio is exactly what the term implies. Let’s say you would like to purchase a $1M property with a down payment of $200,000, or you want to refinance a $1M property up to $800,000 – the LTV ratio would be 80%. In both scenarios, the loan would be $800,000 and the value of the property, $1M…therefore, the loan-to-value ratio would be $800,000 divided by $1M equals 80%. From here, lenders incorporate pre-determined risk factors and scale their qualification criteria, accordingly. Generally speaking, the higher your down payment (or equity position), the less rigid the qualification guideline.

Here is a brief outline summary of the key Loan-To-Value thresholds:

up to 95% LTV – the least skin in the game, you will rarely (if ever) get exceptions from lenders. You are an inside-the-box applicant and need to fully comply with the standard qualification criteria. Regardless of which lender you team up with, the outcome will generally be the same…the lenders will all qualify you for the same amount and approximately the same interest rate (within a negligible margin)
Up to 90% LTV – a few more qualification programs become available in this qualification bin, but still rigid qualification criteria with very little exceptions
greater than 80% LTV – substantially reduced insurer premiums and a more pragmatic approach to exceptions (i.e. proceeding with an approval despite a light credit history, or recently recovered credit mishap, or remaining probationary period with employer)
80% LTV and lower – the entry level conventional, uninsured lending zone. Ironically, an increase in rates (often the highest interest rates as it falls just outside the insured safe haven zone, but only at the doorstep of big down payment territory). Today’s 20% down payment is like yesterday’s 10% down payment…not as powerful and influential as you might think. Still an impressive milestone, but not the money-talks arena.
75% LTV and lower – even better than 80%, a few more unique and niche qualification guidelines open up to you. Rates get lower and more exceptions are granted.
and finally, the mother queen of the LTV scale…65% LTV – this is the big leagues, this is where you get rewarded for all the hard work of either accumulating your prized 35% down payment or owning a property with a comforting equity ratio…just the right amount of equity to creep out of all the lenders risk-pricing parameters. Best possible interest rates and significant qualification flexibility from lenders.