The loan-to-value ratio (LTV) is the amount of a loan divided by the value of the asset that secures it, usually written as a percentage. A home bought for 400,000 with a 320,000 mortgage has an LTV of 80 percent; the remaining 20 percent is the buyer's deposit or equity. The lower the LTV, the bigger the cushion the lender has if it must sell the collateral to recover its money.
LTV is the core collateral measure in mortgage lending, commercial real estate, car finance, securities and crypto lending. It is about the asset, not the borrower's income: lenders pair it with an income test such as the debt service coverage ratio (DSCR) or a debt-to-income ratio. Supervisors also use LTV caps as a macroprudential policy tool to limit risky lending when house prices rise quickly.
Loan-to-value ratio in plain terms
Imagine lending a friend money to buy a bicycle, with the bicycle as backup. If you lend almost the full price and the bike gets scratched or goes out of fashion, selling it might not get your money back. If the friend pays half the price themselves, you are lending against a bike worth twice your loan, and even a big drop in its value leaves you safe.
LTV measures exactly that backup. A low figure means the borrower has a lot of their own money in the asset and the lender is well protected. A high figure means the lender is carrying most of the risk, so it will usually charge more, ask for insurance or say no.
Formula and example
The ratio is calculated as:
- is the outstanding balance of the loan secured on the asset.
- is the appraised value or purchase price, and for new mortgages usually whichever of the two is lower.
A buyer purchases a flat for 250,000 that is appraised at 240,000 and borrows 204,000. The lender uses the lower figure, so LTV is 204,000 ÷ 240,000 × 100 = 85 percent. If prices then fell 10 percent to 216,000 while the balance was still 204,000, LTV would rise to about 94 percent. A fall of more than 15 percent would put the loan above 100 percent, a position known as negative equity.
Where there is more than one loan on the same property, lenders also calculate a combined LTV (CLTV) by adding the balances of the first and second charges.
LTV in mortgage lending
Pricing and product eligibility are banded by LTV. A borrower at 60 percent usually gets a lower rate than one at 90 percent, because the lender's expected loss given default is smaller. In the United States, conventional mortgages above 80 percent LTV normally require private mortgage insurance, and the Homeowners Protection Act of 1998 sets rules for cancelling it as the balance is repaid, including automatic termination at 78 percent of the original value for most loans.
The years before the 2008 financial crisis saw widespread lending at or near 100 percent LTV, often combined with weak income checks, particularly in sub-prime mortgages. When prices fell, many borrowers owed more than their homes were worth, which increased defaults and losses.
Regulatory and wider uses
Many countries now cap LTV on new mortgages. The Central Bank of Ireland, for instance, has applied LTV limits since 2015 with separate allowances for first-time buyers, and authorities in Asia, Europe and elsewhere use similar caps. The Reserve Bank of India sets LTV ceilings for bank housing loans and for loans against gold.
LTV also feeds bank capital rules. Under the revised standardised approach in Basel III, risk weights for residential and commercial real estate exposures rise in bands as LTV increases, so higher-LTV lending requires more regulatory capital.
Outside property, the same idea appears as the advance rate in asset-based lending, the inverse of a haircut in repo and securities lending, and the trigger for a margin call in brokerage accounts. In crypto lending, platforms set a maximum LTV for new loans and a higher liquidation threshold at which the collateral is sold automatically, a process described in forced liquidation. Commercial loan agreements often include a maximum LTV as a financial covenant, tested against regular revaluations.
Limitations
LTV is only as reliable as the valuation behind it. Appraisals can lag the market, be inflated in a boom or vary between valuers. The measure says nothing about whether the borrower can afford the payments, so a low-LTV loan to a borrower with no income can still default. And because asset prices are cyclical, LTVs fall in a boom, encouraging more lending, and rise in a downturn, which is one reason supervisors focus on valuation practices as well as on the ratio itself.