What is LTV and LCR, and why is it so important?
Have you ever wondered: what is LTV and LCR, and why are they so important? Well, you can read our post to find out!
by Victória Lourenço
Learn what LTV and LCR is and how to calculate them!
When you’re looking for a loan, the lender is going to want to know a lot about you. They’ll ask about your income, credit score, and more. But there is something they’ll want to know: what is your LTV and LCR?
Your LTV ratio tells the lender how risky it is to lend you money, and it can have a big impact on whether or not they decide to approve your loan.
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Also, if you want any chance of securing financing in today’s market, you need to understand that possessing good Loan-to-Value (LTV) and Liquidity Coverage Ratio (LCR) metrics are table stakes.
Moreover, if meeting these benchmarks proves especially difficult due to an unfavorable housing market, don’t lose hope!
There are still specialized lenders out there that take such extenuating circumstances into account when considering lending money.
So, if you want to learn more about the financial world and how to improve your chances of getting a loan, keep reading our post to answer this question and others: what is LTV and LCR?
What is LTV and LCR?
LTV and LCR are two important metrics used by lenders to assess loan risk. LTV, or loan-to-value, is a ratio that compares the loan amount to the value of the property.
A higher LTV ratio indicates a higher level of risk for the lender. LCR, or loan-to-collateral, is a similar ratio that compares the loan amount to the value of the collateral.
In general, a higher LCR ratio also indicates a higher level of risk for the lender. When considering a loan, lenders will often look at both the LTV and LCR ratios.
This way, they will get a complete picture of the risks involved.
Also, borrowers with strong credit and low debt-to-income ratios may be able to qualify for loans with higher LTV and LCR ratios than borrowers with weaker credit profiles.
However, all borrowers should be aware that loans with high LTV and LCR ratios may be more difficult to obtain and may come with higher interest rates.
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What is the main difference between LTV and LCR?
As we mentioned, LTV, or loan-to-value, is the ratio of the loan amount to the appraised value of the property.
But LCR, or loan-to-cost, is the ratio of the loan amount to the total cost of the project. Here are a few key differences between LTV and LCR:
- LTV is based on the appraised value of the property, LCR is based on the total cost of the project;
- LTV only includes the loan amount. But since LCR includes both the loan amount and any other costs associated with the project;
- LTV is typically used for primary residences, while LCR is typically used for investment properties.
Now that you know what LTV and LCR mean, you can use them to make informed decisions about your loans.
Remember to consider both ratios when making your decision, as they each offer different insights into your loan.
How do you calculate LCR?
There is a specific formula for you to calculate your LTV, which goes like this: LCR = High-quality liquid asset / total net cash flow.
Moreover, you can understand this by learning that a bank’s LCR is determined by dividing its high-quality liquid assets by its total net cash flows over a 30-day stress period.
Only assets with a high conversion potential into cash are considered high-grade liquid assets.
Why is LTV important?
Both LTV and LCR are important considerations when you’re trying to get the best deal on a mortgage or refinance.
That’s because lenders use them to determine how much risk they’re taking on by lending you money, as we mentioned.
The higher your LTV or LCR, the higher your interest rate will likely pay. So, if you’re hoping to get a lower interest rate, keeping your LTV as low as possible is essential.
There are a few ways to do this:
- Make a larger down payment on your home;
- Add points to your loan (which lowers the amount you borrow);
- Refinance into a loan with a lower principal balance.
By keeping your LTV low, you can save yourself thousands of dollars in interest over the life of your loan.
What is a good LTV?
There is an optimum range for the Loan-to-Value ratio at around 80%. If you can keep these figures up, you will increase your chances of being offered a loan with better terms.
It can also raise the likelihood that you won’t need to pay mortgage insurance. This saves you thousands of dollars over the course of your loan’s lifetime.
This indicates that you will likely be forced to pay for mortgage insurance if your LTV is above 80%.
Mortgage insurance can reassure lenders that they won’t lose money if you default on your loan. And this could encourage them to extend credit to you.
What to consider when getting a mortgage loan?
Now that you know what LTV and LCR is and how to use them to get the best out of them, we want to give you more tips on loans.
There are a few things to consider when shopping for a mortgage. First, you’ll want to ensure you understand the loan’s associated fees.
These can include origination fees, which the lender charges for processing the loan, and Points, which are upfront fees paid to lower the interest rate on loan.
You’ll also want to compare interest rates from different lenders and make sure you’re getting the best deal possible.
Additionally, it’s important to consider the length of the loan term when choosing a mortgage.
A longer-term will mean lower monthly payments, but you’ll ultimately pay more in interest over the life of the loan.
Conversely, a shorter term will mean higher monthly payments, but you’ll save on interest in the long run.
Ultimately, it’s important to weigh all of these factors before choosing a mortgage so that you can get the best deal possible.
Moreover, you should keep researching to learn about the terms, such as LTV and LCR, to stay informed!
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