Loan to Value
Why is “Loan to Value” a key criteria for my home financing ?
Loan-to-value (LTV) is an important ratio for banks to process any credit request. The ratio provides information on how high the credit risk is for the bank.
Its calculation is a percentage that states the proportion between the value of the property and the loan amount.
Example of a loan-to-value ratio
For instance, a loan-to-value of 100% means that the loan finances 100% of the real estate asset valuation. If the borrowers only pay the related acquisition fees when buying a property, the bank covers 100% of the loan issued with a guarantee, usually with a mortgage on the property.
The lower this ratio is, the lower the risk is for the bank. If a buyer can pay the transaction costs and another 10% of the purchase price, loan-to-value is 90%.
In most cases, the property value equals the purchase price. But the bank risk assessment can also include the evaluation of the real estate object to compare the stated acquisition price with their estimation of the asset market value. The main factors influencing the property value are its location, the living space, parking spaces, the nature of the latest renovations, and its current energy performance.
Example of a loan-to-value ratio
For instance, a loan-to-value of 100% means that the loan finances 100% of the real estate asset valuation. If the borrowers only pay the related acquisition fees when buying a property, the bank covers 100% of the loan issued with a guarantee, usually with a mortgage on the property.
The lower this ratio is, the lower the risk is for the bank. If a buyer can pay the transaction costs and another 10% of the purchase price, loan-to-value is 90%.
In most cases, the property value equals the purchase price. But the bank risk assessment can also include the evaluation of the real estate object to compare the stated acquisition price with their estimation of the asset market value. The main factors influencing the property value are its location, the living space, parking spaces, the nature of the latest renovations, and its current energy performance.
Banking regulations
The banking regulator CSSF (Commission de Surveillance du Secteur Financier) limits the loan-to-value ratio on real estate according to the following rules depending on the buyers’ real estate project. Each bank applies their loan-to-value assessment criteria, and they can condition their maximum loan-to-value acceptance, without exceeding the upper limit of 100% loan-to-value.
First-time buyers of a main residence:
First-time buyers in Luxembourg can borrow up to 100%. For joint purchase, If one of the buyers has already been an owner of a property in Luxembourg, they will no longer qualify as first-time buyers. Loan-to-Value rules are stricter for Second-time buyers of a main residence and for the acquisition of a second residence or a rental property.
Second-time buyers of a main residence:
If buyers are no longer considered as first-time buyers as previously explained, and they are buying a new real estate project for their own residential purposes, e.g. to move from an apartment to a house, an extra down payment will be required. In this case, buyers can borrow up to 90% of the value of the property. They must therefore pay at least 10% of the value plus the acquisition fees from their personal savings to respect a maximum loan-to-value of 90%.
Rental property investment / secondary residence:
Anyone who acquires a secondary residence or a property to earn a rental income, must respect a maximum LTV ratio of 80%. Thus, rental property and secondary residence owners will have to pay from their own funds at least 20% of the purchase price before any acquisition fees. Banks can also finance secondary residence which is a holiday property located outside Luxembourg. Since the 80% limit is only a maximum, individual banks may still require a higher down payment contribution.
| Loan-to-Value Ratio | First-time buyers | Second-time buyers |
|---|---|---|
| Main Residence | Up to 100% | Up to 90% |
| Second Residence / Rental property | Up to 80% | Up to 80% |
Impacts of Renovations on the LTV
Renovations can have an impact on the market value of the property or on the LTV. Banks make a distinction between value-enhancing and value-maintaining renovations.
A value-enhancing renovation is, for instance, when the living space is increased by converting the attic or the energy efficiency is improved by new windows or better thermal insulation.
Value-preserving renovations or modernizations are those that should be carried out regularly to maintain the value of the property. This is the case, for example, with the replacement of bathroom fixtures, new tiles, new flooring, etc.
Expensive renovations to the property do not always increase the value of the property. If the existing functional kitchen is replaced with a new high-end kitchen, it may be more attractive at the time of the property sale, if the bank must force the sale of the apartment or house, its value will probably not be reflected in the auction price.
In the case of a bank-financed renovation, the LTV should include a maximum of 80% of the renovation costs. The remaining 20% should be covered by the buyers through additional equity if the original LTV of the purchase price is already 100%.
Since Value Added Tax (VAT) is not a value component, only materials and labor can be financed.
As a conclusion, the lower the LTV, the lower the risk for the bank. A low LTV is also a strong factor in negotiating interest rates.
fidem. will gladly take care of these negotiations for you, so that you can benefit from the best conditions for your real estate project!
KEY TAKEAWAYS
Die wichtigsten Erkenntnisse warum Sie fidem. als Ihren Kreditvermittler wählen sollten
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