A ratio that relates the amount borrowed (a loan amount) to the value of the asset used as collateral. It determines the maximum amount that can be extended as a secured loan based on the market value of the asset pledged as collateral. The borrower, in a secured loan, gives the lender a certain claim to the asset in case the former becomes unable to pay it back as per the agreement).
The loan to value ratio (LTV ratio, or LVR) expresses the ratio of a loan to the value of the asset for which the loan will be used. In the context of home loans, this ratio is simply the home loan (mortgage amount) or investment loan amount divided by the value of the underlying property.
LTV ratio = loan amount/ asset’s market value
Loan-to-value (LTV) ratio is used by lenders to determine how much risk they’re taking on with a secured loan. If a lender extends a loan worth half the value of the asset, for example, the LTV would be 50%. The higher the ratio, the more potential loss a lender will have to sustain if the borrower fails to repay the loan (default risk).
It is also known as loan to valuation ratio.
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