Loan to Value (LTV)
How is it calculated?
Loan to Value = Loan Amount / Collateral Value
Goal of the Ratio
The goal of this ratio is to gauge the strength of the collateral position of a particular loan by comparing the loan amount to the value of the collateral.
When is it used?
Any loan situation (especially when there is only one type of collateral present).
Rules of Thumb
Lower is better - A lower ratio indicates there is proportionally more collateral value present than loan dollars.
Pitfalls of this Ratio
A pitfall of using a LTV is when there are multiple collateral types present in a proposed transaction, and the different type of collateral require different Advance Rates (for example, if for half of the collateral the bank is willing to lend 75% of the value of the collateral, but for the other half only a 50% advance rate is allowed, it can be difficult to identify at what point a LTV ratio becomes a policy exception.
What changes in the ratio could mean:
- Amortization of loan will cause the ratio to decrease
- Changes in collateral value
Other Relevant Terms
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