Loan-to-value ratio

Loan to value ratio- The ratio of the loan amount to the property valuation and expressed as a percentage. E.g. if a borrower is seeking a loan of 200,000 on a property worth 400,000 it has a 50% loan to value rate. If the loan were 300,000, the LTV would be 75%. The higher the loan to value, the greater the lender s perceived risk. Loans above normal lending LTV ratios may require additional security. 

The loan-to-value ratio (LTV) gives a measure of the equity a borrower has invested in a property. A large equity stake provides an important motivation to avoid defaulting on a loan. The ability to save a large deposit may indicate a higher level of financial discipline by the borrower, which should also indicate a lower likelihood of default. 

The loan-to-value ratio (LTV) represents the size of the loan relative to the sales price of the vehicle. The lower the LTV, the more equity a borrower has invested in the vehicle. The equity in the vehicle should act as an incentive to keep the borrower from defaulting, and thus losing the invested equity. Over time, the amount of the loan will decrease as principal is repaid by the borrower. However, the value of the vehicle will most likely be decreasing as well, based on the vehicle s depreciation curve. This makes it necessary to analyse the rate at which principal is being repaid (amortisation schedule) against the rate at which the vehicle is depreciating in order to determine the borrower s expected equity in the vehicle (see term distribution above). 

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