LTV, an abbreviation for Loan-to-Value, is the ratio, expressed as a percentage, between the amount you wish to borrow from the bank and the value of the house you want to buy. Since there are maximum values defined by the Bank of Portugal, and it impacts the interest rate (spread) that the bank will charge you, it is relevant to your mortgage.
But let’s break it down.
What is LTV?
LTV is the ratio, expressed as a percentage, of the amount the bank will lend you to buy your house, and the value of the property. It is calculated using the following formula:
loan amount / property value x 100
In other words, LTV depends on two factors:
- The amount you need to borrow from the bank, which depends on the money you have available for the down payment on the house.
- The value of the house.
What value of the property is used in the formula?
Although the Property Registration Book shows the value assigned by the Tax Authorities (used to calculate the IMI – Municipal Property Tax), this is not the relevant value for LTV.
In fact, for the LTV calculation, only the purchase price (which will appear in the deed) and the bank’s appraisal value are important. The lower of the two values is considered. This is because, since the bank will use the property as collateral for the loan, it wants to ensure that, in case of default, it can recover the money it lent.
Thus, the actual formula for LTV would be:
LTV (%) = loan amount / collateral value associated with the property x 100
The maximum LTV value is currently set by the Bank of Portugal
To prevent situations like those that occurred in 2008 and to protect families, the Bank of Portugal set maximum limits for LTV and loan terms.
In fact, the maximum loan term depends on the borrower’s age, and the LTV has the following maximum limits:
- 90% for home loans intended for the purchase or construction of a primary residence.
- 85% for home loans and loans with a mortgage or equivalent guarantee for other purposes.
LTV can be 100% for bank-owned properties
The Bank of Portugal makes an exception for the maximum LTV value for properties the bank owns for sale, where the LTV can be up to 100%.
Note that properties in the bank’s portfolio are properties whose mortgages were executed by the bank due to default on the corresponding home loan. To recover the debt, the properties are put up for sale, providing the bank with benefits when acquiring them.
LTV can be 100% for the first home purchase by young people up to 35 years old
Here is another case where the LTV can be 100%. If you are under 35, your loan can be 100% of the house value if you meet certain requirements. In fact, when purchasing your first home through the “Tens Futuro em Portugal” program, you can benefit from a public guarantee of up to 15% of the home loan value and secure 100% financing for the house.
LTV determines the down payment and the spread the bank charges you
If the LTV of your loan is 90%, this means that, as a homebuyer, you must pay 10% of the house value with your own funds. In other words, this is an amount you need to have available.
On the other hand, the higher the amount the bank is lending you in relation to the property value, the higher the risk the bank is assuming in lending you the money. As a result, the higher the spread the bank will charge you. The reverse is also true. With a lower LTV, you may be able to negotiate a lower spread for your mortgage.
Get in touch with Lead Kash
If you need a mortgage, talk to us. Lead Kash handles the entire process for you, compares offers from different institutions, and ultimately presents you with the best solution to achieve your goal. And the best part: this service is completely free for you. Make a simulation, contact us, and let us simplify your life.
