You all must have probably heard the word- Combined Loan to Value Ratio several times as it is one of most familiar terms in finance and banking. Lenders, banks and financial institutions generally use this term to express the percentage of loan borrowed to the value of an asset purchased.
Before we begin the insight of Combined Loan to Value ratio, letβs first understand what is loan to value ratio.
Example :
For instance, you borrow an amount of Rs 50,000 to purchase a property of value Rs 1, 00,000. The loan to value ratio will be Rs 50,000 divided by Rs 1, 00,000 or simply it is 50%.
This ratio defines the risk of loan. The higher the ratio, the more will be the risk. The lower the loan-to-value ratio, the better it is, as it means you have more ownership of the asset.
Now, as the name reads Combined Loan to Value ratio, it denotes an additional loan that has to be considered while calculating the Loan to Value ratio. It includes all the loans on the asset purchased instead of considering just the primary one. In simpler words I could say that it is used when the borrower asks for more than one loan.
Let us once again consider the previous example. Consider the same property of value Rs 1, 00,000 with a first mortgage of Rs 50,000 and the second mortgage of Rs 25,000. The aggregate mortgage value will be 75,000 and thus the Combined Loan to Value Ratio will be 75%
Formula Used For Calculation
The Mathematical formula that we use for calculating the CLTV ratio is:
(The value of loan 1 + The value of loan 2)/ The total value of the asset.
Importance of Combined Loan to Value Ratio
Before 2007, combined loan to value ratio had a minimal significance in world of finance. However, today we have realised the worth of this ratio and thus many loan financing companies consider it very imperative and they are willing to offer loan up to 80% of CLTV ratio.
Borrowers should generally target a low combined loan to value ratio as a high combined loan to value bounds your ability to borrow against your asset.
In the nutshell, this value defines your borrowing ability.
Benefits of Combined Loan to Value ratio
This ratio is beneficial as when you donβt have the required amount for the payment of the asset you want to own, you can simply use a first and second mortgage for the purchase. You can elect to break up the loan into a first and second mortgage, to keep the loan-to-value ratio below key levels. This will in turn reduce the interest rate and will also avoid the private mortgage insurance.
At the same time if you have a low combined loan to value ratio, it gives you even greater benefits, as you may qualify for further loans and it will in turn increases the ownership value in your asset.
Related article : What is a Combined Loan?
