Loan to Value (LTV)

Loan to value compares the size of a loan with the value of the collateral provided for it. A 6 million euro loan against a property worth 10 million euros gives an LTV of 60 percent. The lower the ratio, the larger the lender's buffer against a fall in value. In commercial real estate and asset finance an LTV ceiling is agreed as a covenant, and if falling valuations breach it the lender can demand additional security or partial repayment even though the borrower has never missed an instalment.

Because the denominator is an appraised value, a fresh valuation alone moves the ratio. What matters is therefore who appoints the valuer, how often revaluation occurs and whether market value is used or a more conservative mortgage lending value, which in Germany is separately regulated for covered bond banks and emphasises the property's durable characteristics. The ratio is regularly complemented by an earnings-based measure such as debt service cover, because a high-value property with weak letting cannot service the loan despite a comfortable ratio. In corporate acquisitions LTV mainly matters in asset-based financing, while earnings-based measures such as debt/EBITDA otherwise dominate.

Revaluation frequency matters in practice, because an annual valuation in a falling market can cause a sudden breach while less frequent valuation leaves the lender in the dark for longer. Both the rhythm and the questions of who appoints the valuer and bears the cost are therefore negotiated. Cure rights also need settling, usually through partial prepayment or the provision of additional security within a fixed period.