Unraveling CLTV Calculation: A Comprehensive Guide for Jeddah’s Property Market

As a rapidly growing city in Saudi Arabia, the property market in Jeddah has become increasingly competitive. One of the essential factors that property buyers, investors and mortgage lenders use to assess the viability of a property investment is the combined loan-to-value ratio (CLTV). This article will delve into how to calculate CLTV and examine its significance in the thriving Jeddah property market.

Understanding Loan-to-Value Ratio (LTV) and Combined LTV (CLTV)

Before we jump into calculating CLTV, it’s crucial to grasp the concept of loan-to-value ratio (LTV). The LTV is calculated by dividing the property loan amount by the appraised value of the property. In simple terms, it represents the percentage of the property’s value that the lender is willing to finance. A lower LTV typically signifies a lower risk for the lender, as there is more equity in the property as collateral.

The combined loan-to-value ratio (CLTV), on the other hand, considers all the loans taken against a property’s value. If a borrower takes out multiple mortgages or home equity loans, the CLTV provides a comprehensive view of the debt secured by the property relative to its value. Therefore, CLTV is widely used by lenders in Jeddah to evaluate the risk associated with lending to a specific borrower.

Calculating CLTV: The Step-by-Step Process

Calculating CLTV involves three primary steps:

  1. Determine the property’s appraised value
  2. Add up the total mortgage loans and outstanding balance(s)
  3. Divide the sum of mortgage loans and outstanding balance(s) by the property’s appraised value

1. Determine the Property’s Appraised Value

In order to obtain an accurate estimate of a property’s worth, it’s essential to rely on professional appraisers or real estate experts in Jeddah. The appraiser will consider various factors such as location, size, infrastructure, and market conditions to provide an unbiased valuation.

2. Add up the Total Mortgage Loans and Outstanding Balance(s)

This step requires gathering all loan agreements and statements for the property in question. These may include primary mortgages, secondary financing, home equity loans, or any other outstanding debt that is secured by the property.

For example:

  • Primary mortgage loan: SAR 900,000
  • Home equity loan: SAR 200,000
  • Total mortgage loans and outstanding balance(s): SAR 1,100,000

3. Divide the Sum of Mortgage Loans and Outstanding Balance(s) by the Property’s Appraised Value

To determine the CLTV ratio, simply divide the sum of the loan amounts and outstanding balance(s) by the property’s appraised value:

CLTV = (Total mortgage loans and outstanding balances) / Property value

Using the numbers from our example above:

Property value: SAR 1,500,000

Total mortgage loans and outstanding balance(s): SAR 1,100,000

CLTV: 1,100,000 / 1,500,000 = 0.73 (73%)

In this case, the CLTV is 73%, which means that the borrower has a debt of 73% of the property’s value.

CLTV: Why Does It Matter in Jeddah’s Property Market?

In tightly-contested property markets like Jeddah, proper assessment of CLTV ratios can make the difference between a successful investment and potential financial catastrophe. Here are some key reasons why it is crucial to keep track of this metric:

Risk Assessment

Lenders in Jeddah often use the CLTV ratio to analyze risk factors associated with their borrowers. A higher CLTV generally indicates an increased likelihood of default since there is less equity in the property for the lender to reclaim should the borrower fail to repay their loan(s).

Mortgage Eligibility

Borrowers seeking financing from banks or other mortgage providers in Jeddah may find that their CLTV plays a significant role in determining their eligibility. Lenders typically prefer lower CLTVs, as it implies greater property equity and reduced risk from investment.

Refinancing Options

Property owners looking to refinance their existing loans must be aware of their CLTV, as lenders may impose restrictions on refinancing or offer unfavorable terms if the ratio is too high.

A Word of Caution

While calculating your CLTV can provide essential insights into your property’s financial standing, it’s important not to solely rely on this metric when making investment decisions. The CLTV ratio only considers property value and outstanding debt, without taking into account factors such as borrower income, credit history, employment stability, rental yields, and market conditions. For a more comprehensive analysis of the viability of your property investment in Jeddah, combine the CLTV calculation with other assessments for a well-rounded financial and risk evaluation.

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