LTV, meaning “Loan-to-Value”, is a term that describes the ratio between the amount of money being borrowed and the appraised value of the asset being purchased.
While LTV is most commonly used when describing a real estate purchase, it can also apply to other asset purchases as well whenever debt financing is being used.
In this article, we will dig into the specifics of LTV, including its meaning in different situations and how the LTV ratio is calculated.
Of course, we will also be answering the most common questions that we receive about LTV from our members.
This article is part of our free series on how to obtain an overseas mortgage, which you can access now by clicking here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- LTV Meaning
- How to Calculate a Mortgage LTV Ratio?
- How to Calculate LTV Ratio for a Business Loan?
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
LTV Meaning
LTV, meaning the Loan-to-Value ratio, is an important financial metric that reflects the mortgage being used when purchasing a property. Loan-to-Value (LTV) is calculated using two inputs, a purchaser’s down payment amount and a bank’s appraisal of the property value.
Loan approval is typically dependent on LTV being below a specific percentage. Of course, this percentage can fluctuate depending on an individual’s credit score, debt-to-income ratio (DTI), and even the loan term and interest rate.
However, generally speaking, financial institutions have strict underwriting guidelines that they need to follow.
Additionally, LTV can have a slightly different meaning when it comes to refinancing. This is because banks are able to take home equity into consideration as collateral instead of a down payment. Not surprisingly, when a homeowner has built up substantial home equity, they are able to access better loan terms from financial institutions.
How to Calculate a Mortgage LTV Ratio?
To calculate a mortgage LTV ratio, you need to know the appraised value of the property and the total loan being provided by the financial institution. You then divide the total loan amount by the property value. In order to calculate a ratio, you then multiply this resulting number by 100.
Here is the equation for calculating the LTV ratio for a mortgage:
LTV Ratio = (Loan amount / Property value) x 100
That said, the LTV ratio has meaning outside the world of real estate as well. With this in mind, let’s take a look at how to calculate the LTV ratio for a business loan.
How to Calculate LTV Ratio for a Business Loan?
To calculate the LTV ratio for a business loan, you will need to slightly adjust the inputs being used in the calculation. This is because financial institutions will use the value of the collateral being offered by the business instead of the appraised value of a property when determining LTV.
Here is the equation for calculating the LTV ratio for a business loan:
LTV Ratio = (Loan amount / Collateral value) x 100
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Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into LTV meaning. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
How Is LTV Calculated?
LTV is calculated by dividing the total loan amount by the appraised value of a property. This is then multiplied by 100 in order to generate a percentage, which is the Loan-to-Value ratio. That said, when calculating the value of a business loan, LTV uses the appraised value of collateral instead of the appraised value of the property being purchased.
What Is a Good LTV?
A good LTV is typically any LTV below 80%. The reason for this is that LTVs above 80% tend to have higher borrowing costs, require additional insurance (expenses), and may be considered unacceptable.
What Does an LTV of 80% Mean?
An LTV of 80% in real estate means that the value of a mortgage is 80% of the value of the property. Importantly, the financial institution issuing the mortgage values the property through an appraisal process.
Is a 90% LTV Good?
A 90% LTV is high. In most cases, an LTV of 80% is the maximum that financial institutions will allow. This is because going above an LTV of 80% results in additional expenses for the borrower and less favorable borrowing terms including higher interest rates.
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