What loan-to-value ratio measures
Loan-to-value ratio (LTV) compares a secured loan amount with the value of the asset used as collateral. It is most commonly discussed with mortgages, but the concept also appears in other asset-backed lending.
A simple formula is LTV = loan amount ÷ asset value × 100%. For example, a loan of 150,000 secured on a property valued at 200,000 gives an LTV of 75%. The remaining 25% is not necessarily cash held by the borrower; it represents the portion of the valuation not financed by the loan in this simplified example.
Which asset value should you use?
A purchase price, an independent valuation and a lender's accepted valuation can differ. The lender may calculate LTV using a specific value or the lower of two values, depending on policy and jurisdiction. Because of this, a borrower's informal estimate may not be the LTV used in a credit decision.
For refinancing, the outstanding loan balance and a new property valuation can change the ratio without any new purchase. Additional secured borrowing can raise LTV, while repayments may lower it, assuming the collateral value stays unchanged.
Why the ratio matters
Higher LTV generally means a larger loan relative to the asset, leaving a smaller valuation buffer if the asset's price falls. This may influence the maximum amount a lender offers, pricing, insurance requirements or eligibility. A lower LTV may make some products available, but it does not guarantee acceptance or a particular rate.
LTV is only one risk indicator. Income, existing commitments, credit assessment, property type and borrower circumstances remain important. For a property purchase, transaction costs and other expenses can also require cash beyond the amount implied by LTV.
Avoid two common mistakes
- Confusing LTV with debt-to-income ratio: LTV measures debt against collateral value; DTI measures debt payments against income.
- Assuming valuation cannot change: falling asset prices may increase LTV even if scheduled repayments continue.
Check the lender's valuation basis, the exact loan balance used and any thresholds stated in the relevant product documents. Do not compare ratios from different methods as if they were identical.