LTC vs LTV is a common question that we receive from members looking into commercial real estate projects.
In this article, we’ll be exploring both LTC (loan-to-cost) and LTV (loan-to-value) and sharing how they compare to one another.
We will also answer a few of the most common questions that we receive from people wanting to understand LTC vs LTV and how they compare.
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Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- LTC vs LTV
- What Does LTC Mean in Loans?
- What Does Loan-to-Value Mean in Loans?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
LTC vs LTV
The main difference between LTC (loan-to-cost) and LTV (loan-to-value) is that LTC refers to a loan as a percentage of the cost of completing a project while LTV refers to a loan as a percentage of the market value of a completed project. LTC is commonly used for new construction and commercial real estate transactions.
In the following section, we will explain both loan-to-cost (LTC) and loan-to-value (LTV) individually. This will then be followed by answering some of the most common questions that we receive on the topic.
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Loan-to-Cost (LTC)
Loan-to-cost (LTC) refers to the measurement of a loan as a percentage of the total cost to complete a real estate project. The calculation for loan-to-cost is the loan divided by the total construction cost of the related project.
Loan-to-Value (LTV)
Loan-to-value (LTV) refers to the measurement of a loan as a percentage of the market value of an already completed real estate project. The calculation for loan-to-value is the loan divided by the perceived value of the related project.
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What Does LTC Mean in Loans?
In loans, LTC stands for loan-to-cost, which is a measurement of the total loan as a percentage of the cost of completing a project. LTC is just one of the available metrics for determining the value of a loan, and it is most commonly used in determining the loan value of new construction projects in the commercial real estate space.
Loan-to-Cost for Total Project
Importantly, loan-to-cost refers to the loan issued as a percentage of the total project cost. In other words, it takes into consideration all of the variables that contribute to the cost of a construction project. However, as mentioned, it does not take into consideration the perceived value of a project.
What Does Loan-to-Value Mean in Loans?
In loans, loan-to-value is the measurement of the total loan as a percentage of the perceived value of a completed real estate project. In other words, the LTV is a function of how much a project is worth based on the market, at a particular point in time.
Loan-to-Value vs Down Payment
The inverse of a loan is the down payment that an individual (or company) is required to make in addition to the loan, in order to meet the total financial commitment required to purchase a property.
Frequently Asked Questions
Below are three of the most common questions we receive from people looking into the difference between LTC vs LTV. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Is an LTC Ratio in Commercial Real Estate Financing?
In commercial real estate financing, LTC ratio is a measurement of the total loan issued as a percentage of the cost of completing a commercial real estate project. In other words, LTC does not consider the perceived value of the completed project. Instead, it only considers the inputs required to complete the project.
How Does an LTC Ratio Affect Commercial Real Estate Financing?
LTC ratio affects commercial real estate financing as it will dictate whether a borrower’s needs fit within the financing appetite and risk parameters of prospective lenders. The lower that a loan amount is in comparison to the cost of a project, the less risk that will be taken on, which would be a lower loan-to-cost ratio.
What is a Good Loan to Cost Ratio?
What is a good loan-to-cost ratio will ultimately depend on the lender. Not surprisingly, this will be determined by their risk parameters. That said, in most cases, a good loan-to-cost ratio is between 60% and 80%. However, it’s important to review each financing option carefully as there are other inputs that can impact the suitability of a loan that go beyond the ratio to the cost or value.
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