Loan-to-value ratio

LTV is a term from the lending business of banks, namely the ratio of the loan amount and the loan value of collateral.

General

During the - on traffic or market value oriented - lending value represents the theoretical maximum eligibility as collateral for loan collateral, the total credit risk is represented in comparison to the mortgaged collateral with the loan to value ratio.

In the mortgage of real estate, the loan to value represents the ratio of all debt financing ( also registered as preloads liens ) to the lending value of the mortgaged property.

The LTV ratio is a percentage of the mortgage lending value. The lower the calculated percent fails, the lower is the risk of loss that arises after a potential default of the borrower by the recovery of the backup object for the lender. Benchmark for the loan to value ratio is the percent lending limit, which was defined for a particular type of security. One Lending is only justified as a rule of absolute terms when the loan to value ratio is not higher than the lending limit.

Example

A bank grants the owner of a residential property with a loan of EUR 17 million, the fair value of the property serving as collateral amounted to EUR 22 million, while the bank has set the lending value of EUR 20 million. Then the (initial ) loan to value for this loan is 85 % of the loan value. This is a relatively high risk from the bank's perspective, because the lending limit for residential buildings used by banks usually at 80 % for so-called real estate loans is even only 60%. The loan to value ratio of 85 % indicates now that the risk is around 5 % points or even 25 % points above the bank's internal lending limits. However, subsequent repayments then decreases the initial LTV ratio, because - reduce the lending risk - while maintaining a constant mortgage value.

Is the example the residential building has already been charged with a first-rate mortgage in the amount of EUR 1 million in favor of another bank, the loan to value ratio would be 90% deteriorated (1 million preload 17 million private loans: 20 million loan to value ratio ). The reason for the even higher -ranked lending risk is that in the event of a foreclosure sale of the Property of the subordinated bank would act as an operator acting as creditors and thus the senior secured bank advance is entitled to the first million in the distribution of liquidation proceeds. Only then the rest of the proceeds of the subordinated bank is transmitted. This distribution of risk in favor of priority secured creditor must be considered in the LTV ratio, to represent the entire lending risk.

Impact on the credit conditions

A loan whose loan to value ratio is within the lending limit, may be because of - will be awarded to the normal conditions of average credit risk - arising from the loan collateral. In contrast, a credit is more expensive with a LTV ratio of 100 %, because in real estate, for example, lack the equity.

International representation

The usual name in English-speaking Loan -To- Value Ratio (LTV ) takes into account only the ratio of the loan amount to the traffic or the market value of an object. The mortgage lending value, however, is unknown in the English-speaking banking sector.