small house model and coins on opposite sides of small seesaw

In the context of mortgage financing, the Loan-to-Value Ratio (LTV) stands as a pivotal
metric. This ratio, often abbreviated as LTV, holds significant influence over the terms and
conditions of your mortgage. Let’s dive into a detailed exploration of LTV and understand its
impact on your mortgage journey.

What is Loan-to-Value Ratio (LTV)?

Loan-to-Value Ratio (LTV) is a financial metric used by lenders to assess the risk associated
with providing a mortgage. It represents the ratio of the loan amount to the appraised value
or purchase price of the property. For example, if you’re purchasing a property valued at
AED 1,000,000 200,000 and you’re borrowing AED 800,000, the LTV ratio in this case would
be 80%.

The maximum LTV is determined by the UAE Central Bank. It is capped at 85% for UAE
Nationals and 80% for Expatriates, for first-time home buyers and for property value below
or equal to AED 5 Million. The LTV for off-plan properties is capped at 50%.

The Multifaceted Impact of LTV on Your Mortgage
    • LTV and Mortgage Risk Assessment: Lenders use the LTV ratio to evaluate the level of risk involved in providing a mortgage loan. A higher LTV ratio indicates a greater risk for the lender, as there’s less borrower’s equity in the property. Borrowers with minimal equity may be more likely to default on their mortgage payments, if faced with financial challenges or during economic downturns, which increases the lender’s risk of non-payment or foreclosure.
    • LTV and its Influence on Interest Rates: The LTV ratio may influence the interest rates offered by lenders. Generally, borrowers with lower LTV ratios (i.e. with more substantial down payments) are perceived as less risky and may qualify for lower interest rates. Conversely, higher LTV ratios may result in higher interest rates to compensate for the increased risk to the lender.
    • LTV and Loan Approval: LTV ratio is a critical factor considered during the mortgage approval process. While complying with the LTV caps set by the Central Bank, lenders may have maximum LTV limits based on their risk appetite and loan programs. Meeting the LTV requirements is essential for loan approval and securing favourable mortgage terms.

Calculating Loan-To-Value Ratio

The formula to ascertain the Loan-to-Value Ratio (LTV) is straightforward:

LTV Ratio = (Loan Amount/Appraised Value or Purchase Price) × 100%

For instance, if you’re seeking a loan of AED 2,000,000 to acquire a property valued at AED
1,500,000, the LTV ratio would be computed as follows:

LTV Ratio = (AED 1,500,000/AED 2,000,000) × 100%= 75%

Final Thoughts:

Understanding the Loan-to-Value Ratio (LTV) is essential for anyone planning their mortgage. This ratio not only impacts the amount you can borrow but also influences interest rates and loan approval. By familiarizing yourself with LTV and other essential mortgage terminology and their implications, you can make informed decisions and navigate your mortgage journey with confidence.

For professional guidance and insights curated for your use case, contact Lion Mortgage.

Disclaimer: The information provided in this blog is accurate as of the date of publishing and
in accordance with existing regulations, policies and norms. However, please note that
circumstances/ policies may change over time, and it is advisable to verify any information
with relevant authorities or experts before making decisions.

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