Loan-to-value ratio:
formula and worked example

Why lenders start with the loan-to-value ratio

When a bank lends against a property, it holds that property as security. If the borrower stops paying, the lender recovers its money by selling the asset. The loan-to-value ratio, or LTV, tells the lender how much of the property's worth is being funded by the loan and, by implication, how much of a cushion the borrower's own money provides.

A lower ratio means a bigger cushion. A property can fall in value or take a discount at a forced sale and the loan would still be covered. A high ratio leaves little room for either, which is why LTV drives so many decisions: the interest rate offered, whether insurance on the loan is needed and, ultimately, the maximum amount that will be approved.

The ratio is blunt on purpose. It ignores your income, so lenders pair it with checks on repayment capacity. A low LTV does not rescue an unaffordable instalment, and a high one with strong, stable income can still be approved, which is why the number is a starting point rather than the entire decision.

For a buyer, the figure is useful in reverse. It tells you how much down payment you need to bring for a given price and what lenders are likely to think of your application.

The formula and what each input means

• Loan: the amount borrowed against the property, including any other loans secured on it.
• Property value: the value placed on the property, usually the lower of the appraised value and the purchase price, depending on the lender.

The choice of value is where many surprises occur. A buyer who agrees a price of 4,800,000 but whose valuation comes in at 4,500,000 may find the lender using the lower number, which raises the ratio and the cash needed to close.

Worked example: a 3,600,000 loan on a 4,800,000 property

1. 1Take the loan amount: 3,600,000.
2. 2Take the property value: 4,800,000.
3. 3Divide: 3,600,000 ÷ 4,800,000 = 0.75.
4. 4Multiply by 100: 75%.
5. 5Find the buyer's share: 4,800,000 − 3,600,000 = 1,200,000, or 25% of the value.

The buyer therefore needs 1,200,000 as a down payment, before counting registration, stamp duty and other closing costs, which are usually separate.

What different ratios tend to mean

At 50% or less, the lender has a very large margin, and the loan is considered low-risk. Around 75 to 80% is a common band for ordinary home loans in many markets, though the limit differs by country, loan size and borrower profile, and in some places it is set by regulators. Ratios of 90% and above exist but usually come with a higher interest rate, extra insurance or stricter income checks.

The ratio also moves after the loan starts. Repayments reduce the loan, while the property value can rise or fall. If value drops by 10% to 4,320,000 while the loan is still 3,600,000, the ratio rises to about 83.3%, which can make refinancing harder.

It matters later in life too. Home equity, which is property value minus the loan, is the mirror image of LTV: at 75% LTV you hold 25% equity. That equity is what you can draw on for a top-up loan or release when you sell, so a lower ratio also means more financial flexibility in future.

How each extra amount of borrowing moves the ratio

The table increases the loan by 10% with property value fixed.

An extra 360,000 of borrowing pushes the ratio from 75% to 82.5%, a jump of 7.5 points. Each 100,000 of additional loan adds about 2.1 points on this property, so the effect of borrowing a little more is predictable. It also shows how close to a lender's limit you are: at an 80% cap the maximum loan on this property would be 3,840,000, so a loan of 3,960,000 would exceed it by 120,000.

Frequent errors when working out LTV

• Using the asking price instead of the valuation. The lender relies on its own appraisal, which can be lower.
• Forgetting other loans. A second loan or top-up secured on the same property belongs in the numerator, giving a combined LTV.
• Financing costs. If fees and charges are added to the loan, they raise the ratio without raising the property value.
• Treating the ratio as static. Value and balance both change, so the figure at origination is not the figure years later.

There is one more item worth noticing, which is how an LTV band can create a cliff. Some lenders price the loan in steps, so a ratio of 80.5% might attract a higher rate than 79.5%. Where your ratio sits just above a band, a small extra down payment can be worth far more than its size suggests.

Using the ratio when planning a purchase

1. 1Decide the maximum LTV you are comfortable with, not only what a lender allows.
2. 2Estimate a conservative property value and calculate the largest loan at that ratio.
3. 3Subtract the loan from the price to find the down payment, and add closing costs on top.
4. 4Check the monthly repayment against your income at that loan size.
5. 5Hold some reserve so a dip in value or income does not leave you stretched.

A lower LTV costs more upfront but buys flexibility: a better rate, lower repayments and room to manage if conditions change.