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Loan-to-Value Ratio (LTV)
Definition:
The Loan-to-Value (LTV) ratio is a financial metric used by banks and lenders to assess the risk of a mortgage or property loan.
It represents the percentage of the property value that is being financed by the loan, compared to the total appraised property value or purchase price (whichever is lower).
Formula:
LTV=(Loan Amount / Property Value)×100%
Example Calculation:
| Scenario | Loan Amount | Property Value | LTV Ratio |
|---|---|---|---|
| Example 1 | RM270,000 | RM300,000 | 90% |
| Example 2 | RM300,000 | RM300,000 | 100% |
| Example 3 | RM330,000 | RM300,000 | 110% |
- 90% LTV: Borrower provides 10% down payment, common for first-time homebuyers in Malaysia.
- 100% LTV: Full financing — borrower does not need a down payment (rare, usually under special government schemes like LPPSA or SJKP).
- 110% LTV: Loan exceeds property value, typically under SJKP to cover legal fees, insurance, and other related costs.
Why LTV Matters?
Banks use the LTV ratio to evaluate lending risk:
- Lower LTV = Lower risk for the bank (borrower has more equity in the property).
- Higher LTV = Higher risk, as the bank is financing most of the property value, increasing potential losses if default occurs.
This influences:
- Loan approval chances – Lower LTV is usually easier to approve.
- Interest/profit rate offered – Lower LTV may qualify for better rates.
- Down payment requirement – Higher LTV requires less cash upfront from the borrower.
- Eligibility under government rules – Malaysia has specific policies linked to LTV.
Malaysia LTV Guidelines
In Malaysia, Bank Negara Malaysia (BNM) sets rules for LTV to ensure financial stability and prevent property speculation.
| Property Type | Typical Maximum LTV |
|---|---|
| First home | Up to 90% |
| Second home | Up to 90% |
| Third and subsequent home | 70% (as per BNM guidelines to curb speculation) |
| Government schemes (e.g., SJKP, LPPSA) | Up to 100%-110% depending on scheme |
Example: BNM Rule Application
If you are buying:
- First house: RM400,000
- Bank can finance RM360,000 (90% LTV)
- Second house: RM600,000
- Bank can finance RM540,000 (90% LTV)
- Third house: RM800,000
- Bank can finance RM560,000 (70% LTV)
💡 Why 70% for third house?
To discourage excessive property speculation and protect the housing market.
Benefits of a High LTV Loan
| Benefit | Explanation |
|---|---|
| Lower upfront cost | Borrower does not need to pay a large down payment. |
| Easier access to homeownership | Particularly useful for first-time buyers or low-income households. |
| Includes related costs | Schemes like SJKP can cover legal fees, insurance, and stamp duty. |
Risks of a High LTV Loan
| Risk | Explanation |
|---|---|
| Higher debt burden | Borrower owes more, resulting in larger monthly repayments. |
| Negative equity risk | If property value drops, borrower may owe more than the house is worth. |
| Higher default risk | Borrower with minimal equity may have less financial commitment, increasing chance of default. |
| Tighter approval process | Banks may be stricter with high LTV loans, requiring additional documentation or government guarantee (like SJKP). |
LTV in Key Housing Schemes
| Scheme | Typical LTV | Notes |
|---|---|---|
| Standard bank home loan | 90% (first/second home) | Borrower must pay at least 10% down payment. |
| SJKP (Skim Jaminan Kredit Perumahan) | 100% – 110% | Extra 10% covers related costs like legal fees, MRTA insurance, etc. |
| LPPSA (Public Sector Housing Financing Board) | 100% | Designed for government servants, usually full financing. |
Summary
- LTV (Loan-to-Value Ratio) is a key metric showing how much of a property’s value is financed by the bank.
- In Malaysia, 90% LTV is common for first and second homes, but third homes are capped at 70%.
- Government schemes like SJKP and LPPSA can offer 100%-110% financing to make homeownership more accessible.
- A higher LTV makes it easier to buy a home but comes with greater repayment risk and debt burden.