Loan to Value Meaning

Loan to value is the term which is used in the context of loans which are given by banks to the borrowers. Loan to value ratio is one of the methods which is used by banks to decide about the risk associated with the mortgage. Formula of LTV is – Mortgage amount/Value of Property

So for example if the value of property of a person is $500000 and he or she requires mortgage of $300000 than LTV ratio would be .6($300000/$500000). A higher LTV ratio implies more risk to the bank and therefore banks may charge more interest on loan.

It should be kept in mind that a lower LTV does not mean that person would get credit easily. In real world banks use more than one method to decide whether to give loan to the borrower or not and also it looks into qualitative factors also like credit history of borrower, reason for which credit is required and so on.

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