Loan-to-Cost (LTC) is a financial ratio that indicates the relationship between the amount borrowed (the loan) and the total cost of a project, such as the purchase price of the property, renovation costs, and other associated costs. It is expressed as a percentage and helps lenders assess the risk of a loan in relation to the total investment in the project.
The LTC is calculated by dividing the total loan by the total project cost and expressing the result as a percentage. For example, if the total project cost is €1,000,000 and the loan is €750,000, then the LTC is 75% (€750,000 / €1,000,000 x 100).
The LTC is an important indicator in real estate financing, because it shows how much of the total cost of the project is covered by the lender. The higher the LTC, the greater the risk for the lender, because there is less equity in the project. This can prompt the lender to impose stricter conditions or to reduce the loan itself to reduce the risk.
In practice, the LTC is often used for projects that involve renovations or redevelopments, where the total cost includes both the purchase price and the cost of improving the property.