What is Loan-to-Value (LTV) and why is it important in a real estate investment?
Loan-to-value (LTV) is one of the main financial ratios used in the real estate sector and in mortgage lending. This indicator measures the level of risk in a transaction by comparing the loan amount with the value of the asset backing it.
In simple terms, LTV shows what percentage of a property’s value is financed with debt. The higher the percentage, the greater the risk assumed by the lender.
The formula is as follows:
LTV = (Loan amount / Property value) × 100
For example, if a home is worth €100,000 and the bank grants a loan of €80,000, the LTV will be 80%.
What LTV is common in a mortgage?
In Spain, the most common practice is for banks to finance up to 80% of the appraised value of a primary residence, which implies a maximum LTV of 80%.
LTV below 60% → Low risk
LTV between 60% and 80% → Moderate risk
LTV above 80% → High risk
The lower the LTV, the greater the safety cushion against possible declines in the property’s value.
Loan-to-Value (LTV) in real estate crowdlending
In real estate crowdlending, LTV is a key indicator for assessing investor protection. A low LTV means that the value of the collateral significantly exceeds the amount of the loan granted.
As we have explained in real estate crowdlending projects, it is essential to have a strong level of collateral. When Urbanitae grants a loan to a developer, the developer’s ability to repay is scrutinized very carefully. Collateral is also provided so that, if the developer cannot repay, the loan can be covered by those guarantees. This way, investors are not left unprotected.
There is no single formula for calculating LTV based on the value of the collateral, since LTV is calculated by dividing the loan by the property value, and the collateral does not always correspond to the total value of the property.
However, it is possible to estimate LTV based on the value of the collateral and the value of the property. To do so, the value of the collateral is added to the value of the property, and the loan is then divided by this total value. For example, if the property value is €200,000 and additional collateral worth €50,000 is provided, the total value would be €250,000. If the loan is €150,000, the LTV would be 60% ((150,000 / 250,000) × 100).
The case of the Cívitas project, the largest real estate crowdlending project financed in Spain, is somewhat different. In this case, Urbanitae investors came together to grant a €5 million loan to Cívitas. This loan is backed by four Cívitas developments: these are the guarantees. Together, those four developments will generate €12.2 million in free cash flow.
Thus, the guarantees (€12.2 million) amount to more than 240% of the value of the loan. In the Cívitas project, the loan-to-value was calculated by dividing the loan by the value of these guarantees, resulting in an LTV of 41%.
Difference between Loan-to-Value (LTV) and Loan-to-Cost (LTC)
Although they are often confused, LTV and LTC do not measure the same thing:
LTV compares the loan with the value of the asset.
LTC compares the loan with the total cost of the project.
In real estate developments, LTC is especially relevant because it helps analyze the level of leverage relative to the total budget of the transaction.
Conclusion
Loan-to-Value (LTV) is one of the main risk indicators in any type of real estate financing. Understanding how it is calculated and what levels are considered reasonable makes it possible to make more informed decisions, both in traditional mortgages and in real estate investment projects.
Frequently asked questions
Is a high or low LTV better?
A low LTV reduces the risk of the transaction and usually implies better financing terms.
Does LTV affect the interest rate?
Yes. The higher the LTV, the greater the risk assumed by the lender, which may result in a higher interest rate.
Is LTV calculated based on the purchase price or the appraisal value?
It is normally calculated based on the lower of the two values: the purchase price or the appraised value.
