Sarah is purchasing a $500,000 home with a $450,000 mortgage. What is her loan-to-value ratio?

Q: What is the correct answer to: Sarah is purchasing a $500,000 home with a $450,000 mortgage. What is her loan-to-value ratio?

The correct answer is 90%. Option B (90%) is correct because the LTV ratio is calculated by dividing the mortgage amount by the property value: $450,000 ÷ $500,000 = 0.90 or 90%. This is a straightforward mathematical calculation that follows the standard LTV formula used by all Canadian lenders and mortgage insurers. The 90% LTV means Sarah is borrowing 90% of the home's value and making a 10% down payment ($50,000). This calculation method is consistent with OSFI guidelines and mortgage insurer requirements across Canada.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Loan-to-value ratio is the percentage of a property's value that is financed through a mortgage. In Canada, LTV ratios are regulated by OSFI and determine mortgage insurance requirements. Conventional mortgages (LTV ≤80%) don't require insurance, while high-ratio mortgages (LTV >80%) must be insured by CMHC, Genworth, or Canada Guaranty. The maximum LTV for insured mortgages is typically 95% for purchases, though this can vary. LTV calculations use the lesser of purchase price or appraised value. This ratio affects interest rates, qualification criteria, and overall lending risk assessment under federal mortgage regulations.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Think of the property value as a whole pizza ($500,000). The mortgage is like taking slices that equal $450,000. To find what percentage of the pizza you're taking, divide the slices by the whole pizza: 450 ÷ 500 = 0.90 or 90%. The remaining 10% slice is your down payment. When you see LTV questions, visualize the property as a whole pizza and the mortgage as slices taken from it. Always divide mortgage amount by property value to find the percentage of 'pizza slices' being financed.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

For LTV calculations, always divide mortgage amount by property value. Set up the formula: LTV = Mortgage ÷ Property Value. Double-check by ensuring the down payment percentage plus LTV equals 100%.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

As a real estate agent, you're working with first-time buyers who found a $400,000 condo and have $30,000 saved. They need a $370,000 mortgage, creating a 92.5% LTV ratio. You must explain they'll need mortgage default insurance, which adds to their monthly payments and closing costs. This knowledge helps you guide clients toward realistic price ranges and prepare them for additional insurance costs when their down payment is less than 20% of the purchase price.

Question

Mortgage & Real Estate FinanceLtv CalculationsMEDIUM

Sarah is purchasing a $500,000 home with a $450,000 mortgage. What is her loan-to-value ratio?

Answer Options

A

85%

B

90%

C

95%

D

100%