LTV, or loan-to-value, is a ratio used by lenders to determine the risk of issuing a loan. LTV is usually expressed as a percentage and measures the market value of an asset to the size of a loan used to purchase it. LTV is most often applied to mortgages but can be used to calculate the risk of any secured loan.

Ultimately, LTV is a quick way for lenders or investors to calculate whether the proceeds from the sale of an asset will be enough to cover the money they have loaned in the event a borrower can no longer afford the repayments.

Calculating LTV

Calculating LTV as a percentage is as simple as dividing the intended loan amount by the total value of the asset a person is looking to purchase, then multiplying that figure by 100. Here are a couple of examples you might have personally encountered:

Example 1

• Sarah is applying for a mortgage of €300,000 to buy a €375,000 home. 

• €300,000 / €375,000 = 0.8

• 0.8 x 100 = 80% LTV

Example 2

• John wants to buy a new car worth €30,000, but needs a loan of €20,000.

• €20,000 / €30,000 = 0.66

• 0.66 x 100 = 66% LTV

As LTV ratios increase, there's an increased risk for the loan issuer that the principal sum won't be recouped if the borrower has to sell the asset after being unable to afford repayments.

Factors affecting LTV 

When calculating LTV, a loan issuer needs to consider the projected value of an asset over the intended term of the loan rather than the purchase price. 

Using the examples listed above, John's €30,000 car may only be worth €15,000 on the used market. If John can't afford his repayments and is forced to sell, the loan issuer wouldn't break even. On the other hand, if a mortgage issuer feels that the housing market is stable or even growing, Sarah's 80% LTV might make sound financial sense.

The importance of LTV for investors

Peer-to-peer lending, where investors club together to provide a loan to a person or business, is becoming increasingly popular. In effect, each investor fulfills the role of a traditional bank, issuing a small percentage of the principal sum and making a return through the interest added to repayments. 

As with any form of investing, there's no guarantee of success. Just as the price of stocks and shares can fall as well as rise, crowdfunded loans always run the risk of failure, with the borrower defaulting and having to use the purchased asset to try and pay back as much of the lump sum as possible.

For peer-to-peer investors then, LTV is a crucial consideration when deciding whether to back a project with their hard-earned cash. 

LTV and the LendSecured platform      

Lendsecured's crowdlending platform helps connect investors to borrowers across Europe, providing a platform where investor funds can help implement the ideas of small and medium businesses in the European agricultural sector. 

LendSecured's experienced professionals evaluate business strategies and construction plans using a proprietary scoring system while ensuring an average LTV of 40%. Every project is fully transparent and comes with additional guarantees: personal guarantee, 3-way agreement, commercial pledge. Mortgage data viewable online at the Land Register of the Republic of Latvia www.zemesgramata.lv.