Definition, What It Tells You, Calculation

What Is the Loan-To-Value Ratio (LTC)?

The loan-to-cost (LTC) ratio is a metric used in commercial exact assets development to compare the financing of a enterprise (as presented by means of a loan) with the cost of building the enterprise. The LTC ratio lets in commercial exact assets lenders to unravel the risk of offering a development loan. It moreover lets in developers to grab the quantity of equity they retain during a development enterprise. Similar to the LTC ratio, the loan-to-value (LTV) ratio moreover compares the advance loan amount on the other hand with the fair-market charge of the enterprise after final touch.

The Manner for LTC Is


$\begin{array}{cc}& \text{Loan to Value}=\frac{\text{Loan Amount}}{\text{Building Value}}\end{array}$

get started{aligned} &text{Loan to Value} = frac{ text{Loan Amount} }{ text{Building Value} } end{aligned} ​Loan to Value=Building ValueLoan Amount​​

What Does the Loan-To-Value Ratio Tell You?

The LTC ratio is used to calculate the proportion of a loan or the quantity {{that a}} lender is ready to provide to finance a enterprise in step with the hard fee of the advance funds. After the advance has been completed, the entire enterprise will have a brand spanking new charge. On account of this, the LTC ratio and the LTV ratios are used facet by means of facet in commercial exact assets development.

The LTC ratio helps to delineate the risk or probability level of providing financing for a development enterprise. In spite of everything, a greater LTC ratio means that it is a riskier enterprise for lenders. Most lenders provide loans that finance only a positive proportion of a enterprise. Most often, most lenders finance up to 80% of a enterprise. Some lenders finance a greater proportion, on the other hand this maximum ceaselessly involves a significantly higher interest rate.

While the LTC ratio is a mitigating factor for lenders which could be making an allowance for the provision of a loan, they are going to must moreover consider other parts. Lenders may additionally be mindful the site and price of the property on which the enterprise is being built, the credibility and experience of builders, and the borrowers’ credit score rating record and loan history as well.

Example of Use LTC

As a hypothetical example, let’s assume that the hard development costs of a commercial exact assets enterprise are $200,000. To make certain that the borrower has some equity at stake throughout the enterprise, the lender provides a $160,000 loan. This assists in keeping the enterprise moderately further balanced and encourages the borrower to seem the enterprise via its final touch. The LTC ratio on this enterprise may well be calculated as $160,000 / $200,000 = 80%.

The Difference Between Loan-to-Value and Loan-to-Value Ratio

Carefully related to LTC is the loan-to-value ratio, on the other hand it is moderately different. The LTV ratio compares the whole loan given for a enterprise towards the charge of the enterprise after final touch (fairly than to its fee of establishing). Taking into account the above example, let us suppose that the long run charge of the enterprise, once completed, is double the hard development costs, or $200,000. If the whole loan given for the enterprise, after final touch, is $320,000, the LTV ratio for this enterprise would also be 80% or $320,000 / $400,000.