What are Loan To Value Ratios?
The loan-to-value ratio, or LTV, is a measure of the relationship between the loan amount and the value of the commercial real estate (collateral). It is used to measure, or determine risk when financing commercial property or making a commercial mortgage. Calculating the LTV is a key component in helping commercial real estate lenders determine both the qualification of a borrower and the proposed terms of the debt being considered.
Calculating Loan To Value Ratio
A simple way to calculate the loan-to-value ratio is:
LTV= Loan Amount / Appraised Value
75% LTV Commercial Mortgage
In this chart the commercial property loan represents 75% of the value of the property with the owner equity making up the other 25% (thereby addressing 100% of the property value)
A lower LTV results in more competitive commercial loan terms and rates, whereas a high LTV results in higher risk, and therefore less advantageous loan terms for the borrower.
For example, suppose that a building is worth $10 million and the existing loan is $6 million. That means the LTV is 60%. This would be a lower risk and more competitively priced loan than perhaps an $8 million loan (80% LTV) on the same property.