Loan-to-value (LTV)
What are they?
The loan-to-value (LTV) is the ratio between the loan amount requested for the purchase of a property and the appraised value of that property. This indicator is used to measure the level of leverage and the risk associated with the financing. A high LTV indicates that the loan covers a larger portion of the property value, representing a higher risk for the lender. Conversely, a low LTV implies a higher contribution of equity from the buyer, reducing that risk.
The LTV is a key parameter for both financial institutions and buyers, as it directly influences the loan conditions, such as the interest rate or initial contribution requirements. The higher the LTV, the higher the interest rate typically applied, as the institution assumes a greater level of exposure.
Key aspects to consider
The calculation of the LTV is performed by dividing the loan amount by the appraised value of the property and expressing the result as a percentage. For example, if a loan of 80,000 euros is requested for a property appraised at 100,000 euros, the LTV would be 80%.
A high LTV may indicate that the borrower is assuming a significant financial burden in relation to the property value, which could cause problems in case of market downturns or economic difficulties. For this reason, lenders tend to view a low LTV positively, as it offers greater security and reduces the risk of default.