What it means
When you borrow against a house, a building or other asset, the lender holds a claim on that asset. The LTV ratio shows how much of the asset's value the loan represents.
A low LTV means the borrower has put in a lot of their own money, and a high LTV means the loan covers most of the value. Lenders care because the asset is their safety net.
If a borrower defaults, the lender sells the asset to recover the debt, and sale prices can fall short of expectations. A 60% LTV leaves a large buffer for a fall in value, while a 95% LTV leaves almost none.
LTV affects the terms on offer. Lower LTV loans usually come with lower interest rates, a wider choice of lenders and fewer extra conditions.
Higher LTV loans may need mortgage insurance (a policy that protects the lender, paid for by the borrower), carry higher rates or be refused outright. The value used is normally the lower of the purchase price and the lender's own valuation.
In commercial lending, lenders also look at LTV alongside income measures such as the debt service coverage ratio. LTV can change over time, rising when asset values fall and falling when the loan is repaid or values rise.
Borrowers can lower their LTV in several ways. A larger deposit, repaying part of the loan early or a rise in the asset's value all reduce the ratio.
Borrowers with lower LTVs often find it easier to refinance, because lenders see them as safer. LTV is used well beyond property.
Car loans, equipment finance and loans secured on share portfolios all use similar ratios, and corporate lenders sometimes set a loan-to-value covenant that requires the borrower to repay or add security if the ratio rises too high.
In practice
Real-world examples.
Example
A couple buys a home for $500,000 with a $100,000 deposit. They need a $400,000 mortgage, giving an LTV of 80%. The lender offers a better rate than it would at 90%. They decide to save for another year to bring the ratio down further.
Example
A manufacturer wants a $1,200,000 loan secured on machinery valued at $2,000,000. The LTV is 60%, which the lender considers comfortable. The loan is approved with a modest interest margin. The lender takes the machinery as security and values it again each year.
Example
An investor borrows $300,000 against a share portfolio worth $500,000. The lender sets a maximum LTV of 70% and requires extra collateral if the portfolio value falls. When markets fall, the LTV passes the limit and the investor must add cash or sell holdings. He sells part of the portfolio to bring the ratio back under the limit.
Formula
Calculation
LTV = Loan amount / Appraised value of the asset x 100%
A buyer purchases a property valued at $400,000 with a $320,000 mortgage. LTV = $320,000 / $400,000 = 0.80, or 80%. The deposit is $400,000 - $320,000 = $80,000, which is 20% of the value. If property values fall by 10% to $360,000 and the loan balance is still $320,000, the LTV rises to $320,000 / $360,000 = 88.9%. The ratio can also be turned around to find the largest loan a lender allows: Maximum loan = Value x Maximum LTV. At a maximum LTV of 75% on the $400,000 property, the largest loan is $400,000 x 0.75 = $300,000, so the buyer needs a deposit of at least $100,000.Case study
Seen in the real world.
Fernhill Properties is an illustrative, fictional company that bought an apartment block for $3,000,000, funding it with a $2,400,000 loan. The initial LTV was 80%, and the lender's covenant required it to stay below 85%.
Two years later, the local market weakened and a fresh valuation put the block at $2,700,000. The loan balance had reduced to $2,340,000, giving an LTV of $2,340,000 / $2,700,000 = 86.7%, which breached the covenant.
Fernhill negotiated a waiver in return for repaying $200,000 early. That reduced the loan to $2,140,000 and the LTV to about 79.3%, restoring the buffer. The illustrative story shows that LTV can move even when the borrower pays on time. The lesson for the finance team was to track the ratio each quarter, not only at the start of the loan.
Watch out
Common mistakes.
- Using the purchase price instead of the lender's valuation when the two differ.
- Assuming LTV stays fixed after the loan is made, when asset values change and the ratio changes with them, sometimes in a way that breaches a loan covenant.
- Confusing loan-to-value with loan-to-cost, which compares the loan with the total project cost rather than the finished value.
Questions
People also ask.
What is a good LTV?
Lower is safer for the lender, and many residential lenders offer their best rates at 60% to 80%, though limits vary by country and loan type.
Does a higher LTV always mean a higher interest rate?
Usually, yes, since the lender takes more risk, though other factors such as credit score and income also affect the rate.
How can I reduce my LTV?
You can pay down the loan, make a larger deposit or wait until the asset's value rises, and a new valuation may be needed to prove it.
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