Loan-to-Cost Ratio

The loan-to-cost ratio helps lenders measure how much of a project’s cost they are financing and how much the borrower is contributing.

Total cost usually includes the land or property purchase price, construction or renovation costs and other expenses, such as professional fees and financing costs.

For example, a developer’s project costs 10,000,000 in total. If the lender provides a loan of 7,000,000, the loan-to-cost ratio is 70%, and the developer must fund the remaining 3,000,000.

Lenders prefer lower loan-to-cost ratios, because the borrower has more of their own money at risk, giving them a stronger incentive to complete the project successfully and providing a cushion if costs rise or values fall. Construction lenders often limit loans to between about 60% and 80% of cost, depending on the project’s risk.

Loan-to-cost differs from loan-to-value, which compares the loan with the property’s value. For a profitable development, the completed value should exceed its cost, so the loan-to-value ratio on completion would be lower than the loan-to-cost ratio.