Loan-to-Value (LTV)
Loan-to-value is the loan amount divided by the property's appraised value or purchase price, expressed as a percentage. It measures how much of the property's value is financed with debt.
LTV = Loan Amount / Appraised Value
What LTV measures
Loan-to-value describes the cushion between the loan and the collateral. At 65 percent LTV, the property's value would have to fall by more than 35 percent before the loan balance exceeded what the collateral is worth. That cushion is the lender's protection against a decline in value, and it is why LTV limits sit in nearly every written credit policy.
How it is calculated
LTV = Loan Amount / Appraised Value
Most policies use the lesser of appraised value or purchase price on an acquisition, so a buyer who overpays does not receive a larger loan than the appraisal supports. On a refinance, where there is no purchase price, the appraisal carries the whole weight.
A worked example
A $3,400,000 loan on a property appraised at $5,200,000 is a 65.4 percent LTV. If the same property is bought for $5,000,000, the policy test runs against the lower figure and the LTV becomes 68 percent.
Related measures
- Loan-to-cost (LTC) compares the loan to total project cost rather than value, and governs most construction lending, where value does not yet exist.
- Combined LTV (CLTV) adds subordinate debt to the numerator. A senior loan at 65 percent with a mezzanine piece behind it may be 80 percent combined, which is the number that describes the actual risk in the capital stack.
- As-stabilized LTV tests the loan against the value the property is expected to reach after lease-up or renovation rather than its value today.
The limitation lenders care about
LTV is measured once, at origination, against a value that was itself an estimate. It then drifts for the entire loan term without being remeasured.
A loan closed at 65 percent LTV in a 5.5 percent cap rate market is above 75 percent if cap rates widen to 6.5 percent and income holds flat, and the lender usually learns this at maturity rather than in real time. Credit teams pair LTV with debt yield, which does not depend on a valuation, and run cap rate stress testing against the maturity schedule as standard portfolio work.
Where LTV goes wrong
An appraisal built on comparable sales from a materially different submarket or a stale period produces an LTV that is arithmetically correct and practically meaningless. Loans structured with earn-outs or future funding can pass an LTV test at initial funding and fail it fully drawn. And an LTV that excludes subordinate debt describes only part of the deal.