A loan in which the borrower pledges some asset like home as security to the lender is called a secured loan. The security offered by the borrower is called collateral. If the borrower is unable to repay the loan amount to the lender, the latter can seize the security at stake to recover his money.
Secured loans are open to homeowners only who have equity in their homes. Equity is the difference between the price for which a property could be sold and the total debts registered against it. The amount granted as secured homeowner loans is calculated on the basis of equity available in the home. The lenders can provide up to 90% of the equity of the house. In case the borrower has many mortgages running against his home and is suffering from insufficient or negative equity, the lender may grant him up to 125% LTV.
LTV stands for Loan to Value. It is one of the key factors that the lenders assess when qualifying borrowers for a . LTV is calculated by dividing the mortgage balance by the property value, and multiplying the result by 100. Thus, LTV is the mathematical calculation that expresses how much value of equity is left in the house and, thereby, how much amount can be granted as another loan to the borrower.
The lesser the equity, the better it is, because as the LTC ratio of a loan increases, qualification criteria for the new loan becomes more stringent. Let us understand this with the help of an example. Suppose that borrower 'A' has his house that values ?100,000. 'A' has a mortgage running on his home. The amount due on this mortgage is ?50,000. So, the equity = mortgage balance (?50,000) / the value of the property (?100,000) X 100 = 50%. This means that the borrower has 50% of his equity free for another loan. In this case, the loan amount that 'A' is eligible for is ?50,000 as a secured loan.
In another case, suppose that 'B' has his property valued at ?100,000 and has two mortgages running on his house amounting to ?50,000 and ?25,000. This means the LTV = ?50,000 + ?25,000 / ?100,000 X 100 = 75%. This implies that only 25% of the equity of borrower 'B' is free. Thus, the loan amount 'B' is capable of amount to ?25,000 as secured loan.
So, it's clear from the example cited above that the lesser the LTV, the better chances for the borrower to get a huge amount as a secured loan.
