The difference between Loan-to-Value (LTV) and Loan-to-Cost (LTC) lies in the basis on which they are calculated and the focus they place in real estate financing:
- LTV (Loan-to-Value):
- Definition: LTV is the ratio of the loan to the market value of the property at the time of financing. It is expressed as a percentage of the value of the property compared to the amount borrowed.
- Usage: LTV is often used for existing real estate properties, where the value of the property at the time of the loan is decisive.
- Formula: LTV = (Amount borrowed / Market value of the property) x 100.
- Example: If a property has a market value of €1,000,000 and €750,000 is borrowed, the LTV is 75%.
- LTC (Loan-to-Cost):
- Definition: LTC is the ratio of the amount borrowed to the total cost of the project. This includes not only the purchase price of the property, but also the costs of renovation, remodeling, and other additional project costs.
- Usage: LTC is primarily used in real estate development or redevelopment, where the total cost of the project is important in assessing financing.
- Formula: LTC = (Loan amount / Total project cost) x 100.
- Example: If the total cost of a real estate project, including renovation and purchase, is €1,200,000 and the loan is €900,000, then the LTC is 75%.
In summary:
- LTV looks at the ratio of the loan to the market value of the property, while LTC looks at the ratio of the loan to the total cost of the project (including purchase and renovation).
- LTV is often used for existing real estate properties, while LTC is more relevant for real estate development projects or properties with renovation needs.