Loan-to-Value (LTV) is a financial ratio that indicates the relationship between the amount borrowed (the loan) and the value of the underlying property or asset. It is expressed as a percentage and helps lenders assess the risk of a loan.
For example, if a property is valued at €500,000 and a loan of €400,000 is provided, the LTV is 80% (€400,000 / €500,000 x 100).
In the context of real estate financing, the LTV is often calculated based on the expected final value of the property after renovation or other type of improvement (for example after a conversion or redevelopment). This is called the “project value” or “after-renovation value” (ARV) . It means that the financing is not only based on the current market value of the property, but on the future value that the project will have after the planned work has been carried out.
For example, if a property is currently worth €500,000 but is expected to be worth €700,000 after renovation, the LTV can be calculated based on this higher final value, which provides more headroom for the loan and is potentially more attractive to both the lender and the borrower.
A lower LTV generally means less risk for the lender, because there is more equity in the property. However, if the LTV is based on the future value of the property, lenders may be willing to lend a higher percentage of the value, as long as the risk is justified by the expected value of the project after renovation.