Loan-to-Value Ratio (LTV)

LTV is most commonly used for mortgages. It is calculated by dividing the loan amount by the property's value or purchase price.

For example, a buyer purchasing a home for 300,000 with a deposit of 60,000 needs a mortgage of 240,000. The LTV is 80%.

Lenders use LTV to assess risk. A lower LTV means the borrower has more equity in the property, which gives the lender a bigger cushion if property prices fall or the borrower defaults. As a result, lower LTV mortgages usually come with lower interest rates. Mortgages with high LTVs, such as 90% or 95%, are riskier for lenders and tend to carry higher rates, and in some countries may require the borrower to pay for mortgage insurance.

LTV changes over time. As the borrower repays the mortgage and as property values rise, the LTV falls, which may allow the borrower to remortgage at a better rate. If property prices fall sharply, LTV rises, and borrowers can end up in negative equity, owing more than the property is worth.