Loan-to-Value Ratio (LTV) is the mortgage amount requested for a property over the appraised value of the property. The LTV ratio is a lending risk assessment that banks and other lenders use before approving a mortgage. A higher LTV ratio means a higher perceived risk risk of the mortgage. This may result in the mortgage request being rejected or the prospective borrower being required to source more deposit money. The formula is:
For example, company X needs to borrow $220,000 to purchase an investment property for $250,000. In this case, the LTV ratio is 88%. However, the bank requires 15% deposit at $37,500 which is 85% of the property value. Since the LTV ratio is higher than the deposit ratio by 3% the mortgage may be more difficult to obtain.