Loan to value, and how to compute it

One ratio, computed the same way every time, tells you where you stand.

Loan to value, written LTV, is the ratio of what you owe to what your collateral is worth. It is the most useful single number in this entire track because it compresses everything — how much you borrowed, what happened to prices, how much interest has accrued — into one figure that can be compared against a threshold.

LTV = loan balance ÷ collateral value

loan balance: Principal drawn plus interest accrued and not yet paid. Use today's figure, not last month's.
collateral value: Either market value or lending value — but the same one every time you compute it.
LTV: A percentage. Rising means less room; falling means more.

The trap is the denominator. Some agreements state the maintenance threshold against market value, others against lending value after haircuts. The same loan produces a very different LTV depending on which you use, so the ratio is only meaningful once you know which denominator your agreement specifies. If you compute LTV against market value and your threshold is written against lending value, you will believe you have far more room than you do.

There is a second, subtler trap in the numerator. Accrued interest is part of the balance even before it is billed. A loan that looks static because you have not drawn anything is in fact rising every day. LTV drifts upward with no price movement whatsoever.

Get in the habit of stating an LTV with its basis attached, the way you would state a temperature with its scale. Sixty-two percent on lending value and sixty-two percent on market value are different facts, and the number alone does not carry the distinction. When a statement, a banker, and your own spreadsheet each quote a figure, the first question is not whether they agree but whether they are measuring the same thing.

One last property makes LTV worth computing repeatedly rather than once. It is a ratio, so it responds to both of its inputs, and the two inputs move on different schedules. Prices move continuously and can move violently. Your balance moves slowly and only upward unless you repay. That means LTV has a slow structural drift upward with occasional sharp jumps, which is a very different shape from a number that simply wanders.

Key terms

Loan to value (LTV): Loan balance divided by collateral value, expressed as a percentage.
Denominator basis: Whether your agreement measures LTV against raw market value or against haircut-adjusted lending value. The two give very different answers.
Accrued interest: Interest earned by the lender but not yet charged to you. It is part of what you owe, so it is part of the LTV numerator.

Worked example

The same loan, two denominators

Balance $300,000. Market value $600,000. Blended advance rate 60%, so lending value is $360,000.

LTV against market value: 50.0%
LTV against lending value: 83.3%
If the threshold is 70%: Comfortable on one basis, breached on the other
Which one is right: Whichever your agreement names

A 33-point difference in the same loan on the same day. Reading the denominator basis out of your agreement is not optional.

Check yourself

Your balance is $250,000, market value is $700,000, and the blended advance rate is 50%. What is LTV on each basis?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.