Loan to value (LTV)

What it means

Loan to value, or LTV, is the ratio of a loan to the value of the asset securing it, most often property subject to a mortgage. It is expressed as a percentage: a 160,000 euro loan on a property worth 200,000 euros has an LTV of 80 %. The higher the ratio, the smaller the bank’s cushion if it has to sell the collateral.

Do not confuse it with the marketing LTV, customer lifetime value, which expresses how much a customer is worth over the relationship. In banking and property finance LTV always means the loan-to-collateral ratio.

For mortgage loans to individuals the National Bank of Slovakia sets LTV limits, generally at most 80 % with limited room for higher values. For business loans the bank sets its own limits according to the type of asset, the client’s creditworthiness and the purpose of the loan.

How it works in practice

The bank determines the collateral value from an expert valuation or its own assessment, not from the purchase price. If the valuer puts the property lower, the LTV comes out higher and the bank may lend less or ask for more security. This is worth allowing for when planning the equity needed for a purchase.

In investment loans and development finance, LTV often appears in the loan agreement as a covenant: the company undertakes that the ratio will not exceed a threshold for the life of the loan. If the property’s value falls, this can trigger an obligation to add security or partly repay.

A lower LTV usually means a lower interest rate, because the bank bears less risk. It is therefore sometimes worth putting in more of one’s own money or offering extra security if it significantly improves the rate for the whole term.

What to watch out for

The most common mistake is planning on the maximum LTV the bank offers with no buffer. If property prices fall or a stricter valuation is made at refinancing, the company may find it cannot get the same loan amount again and must make up the difference from its own funds.

With LTV-based covenants, watch out for periodic revaluation. Some agreements require a new expert valuation every year or when the market falls, at the borrower’s cost. The revaluation terms are best negotiated before signing.