Understanding Loan-to-Value Ratio | Credit KO

For anyone who’s considering buying a property or their dream house in Hong Kong, it’s crucial to understand the Loan-to-Value Ratio (LTV). This metric will significantly impact your mortgage eligibility, loan amount, interest rate and down payment amount.

By grasping how LTV works and the factors influencing it, you can make informed decisions to secure the best possible mortgage deal. In this comprehensive guide, an in-depth exploration of LTV as a key factor in your mortgage is provided, empowering you to navigate the Hong Kong property market with confidence.

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

The Loan-to-Value Ratio (LTV) is a financial metric that measures the size of a mortgage loan relative to the value of the property it secures. Essentially, it represents the percentage of a property’s value that a lender is willing to finance. A higher LTV indicates a larger loan amount and a smaller down payment, while a lower LTV implies a smaller loan and a larger down payment.

How Is Loan-to-Value Ratio (LTV) Calculated?

The Loan-to-Value Ratio (LTV) is calculated by dividing the mortgage loan amount by the property’s appraised value and multiplying the result by 100. For example, if you borrow HKD 5 million to purchase a property valued at HKD 6 million, your LTV would be 83.33%. This means the lender is financing 83.33% of the property’s value. To further illustrate, consider a property valued at HKD 8 million with a mortgage loan of HKD 6.4 million. The LTV, in this case, would be (6,400,000 / 8,000,000) * 100 = 80%.

It’s important to note that Hong Kong’s government imposes maximum LTV limits on properties of different values. These limits vary and can significantly impact the loan amount a borrower can obtain.

Property Value	Maximum Loan-to-Value Ratio
HKD 4 million to 10 million	80% or 90% (subject to conditions)
Over HKD 10 million to under HKD 11.25 million	80-90% (loan cap of HKD 9 million)
HKD 11.25 million to 15 million	80%
Over HKD 15 million to HKD 17.15 million	70-80% (loan cap of HKD 12 million)
HKD 17.15 million to 30 million	70%

Factors Influencing Loan-to-Value Ratio (LTV)

There are various factors that can influence Loan-to-Value Ratio (LTV). You should be aware of these factors prior to making the calculation.

Income Stability and Diversity

Income status is one of the critical factors that banks and lending institutions consider when evaluating a loan application. For lenders, the higher and more stable the applicant’s income, the higher the likelihood of timely repayments, thus allowing for a higher LTV to be granted. Banks also take into account other sources of income, such as commissions, rental income, and investment returns.

Creditworthiness and Repayment History

Lenders typically consider an applicant’s credit history when reviewing a loan application. Generally, applicants with good credit history are seen as having a higher likelihood of making timely repayments and, therefore, may be offered a higher LTV. Conversely, applicants with poor credit history or a history of defaulting on payments may be denied the mortgage loan or may only qualify for a lower LTV.

Property Value

According to current housing policy, the maximum LTV varies for properties of different values. Additionally, the type of property can also influence the LTV that banks are willing to grant. For instance, for village houses or tenement buildings, even if the property value falls within the HKD 4 million to 10 million range, lenders may not offer a high LTV due to risks associated with the property age and other factors.

How Does Loan-to-Value Ratio (LTV) Affect Your Mortgage?

The Loan-to-Value Ratio (LTV) exerts a profound influence on the mortgage application process. Beyond its role in determining loan amounts and down payments, LTV has significant impacts in various aspects.

Lender Risk Assessment

A higher Loan-to-Value Ratio (LTV) generally means a higher risk for the lender. This could result in stricter loan terms, such as higher interest rates or larger down payments. Aim for a lower LTV to improve your chances of securing better loan conditions.

Mortgage Approval Criteria

Lenders assess your LTV to determine your loan eligibility. If your LTV exceeds a lender’s threshold, your mortgage application may be declined or require stricter conditions. Maintaining a lower LTV increases your chances of approval.

Interest Rate Determination

A lower LTV often translates to a lower interest rate. Lenders perceive lower LTV loans as less risky, which can benefit you with potentially lower monthly payments.

Down Payment Impact

Your LTV directly determines the size of your down payment. A higher LTV means a smaller down payment, but it could also lead to less favorable loan terms. Consider saving for a larger down payment to improve your LTV and potentially secure better mortgage rates.

Property Valuation

The type and value of the property you’re purchasing influences your LTV. Different property types, such as self-occupied or investment properties, have different LTV limits. Additionally, higher property values often correlate with lower maximum LTV ratios.

Buyer Eligibility and LTV

If you are a first-time homebuyer, you can benefit from more lenient LTV guidelines compared to repeat buyers. For example, you can obtain mortgage loans up to 90% LTV ratio for properties valued at HK$8 million or below. The government also offers relaxed stress test requirements for first-time homebuyers, which means that banks can approve mortgage loans up to 90% LTV for them.

Mortgage Insurance Trigger

A high LTV may require you to purchase mortgage insurance. This protects the lender but adds to your overall borrowing costs. Aim for a lower LTV to avoid this additional expense.

Contact Credit KO for Your Mortgage Needs

Credit KO offers expert guidance and assistance in securing the best possible mortgage loans. Our team can help you understand the Loan-to-Value Ratio (LTV), explore financing options, and find the ideal mortgage solution for your needs.