Loan-to-value (LTV)

Loan-to-value (LTV) is the ratio of a loan amount to the value of an asset pledged as collateral. Generally, LTV is used to evaluate how much collateral coverage a loan will have – the lower the LTV ratio, the higher the coverage, and thus, the lower the risk. For example, a real estate loan for €750,000 on a €1m property would mean an LTV ratio of 75%. The discrepancy between the loan amount and the asset value provides a cushion in case of default. Even if the asset value depreciates, the original value proves an overestimate, or additional costs of chasing the borrower occur, the lender should be able to recover (most of) the capital. Most real estate lending sites offer LTVs between 50% and 80%.