What is LTV or Loan to Value
Loan to Value - LTV
Put simply, the term is there Loan to Value - referred to as LTV for short - for that Ratio of the loan amount to the market or market value of a property. So it indicates how much credit you get based on the value of the property. So he doesn't quite match that Mortgage lending value, which is used by the banks in Germany as a guideline for real estate financing. Nonetheless, the LTV is a much-used metric that is important when assessing creditworthiness and approving financing.
The calculation is done as follows:
Loan to Value = (loan volume / market value of the property) x 100
A key figure with variable definition
The Loan to Value plays a big role in real estate loans. It is defined as the ratio of credit to property value. The value is a quantity that is determined differently by each bank. A usual valuation corresponds, for example, to the market value according to a created Real estate appraisal minus a security discount of, for example, 20 percent. This is how the mortgage lending value is created. If the loan to value is then 80 percent, for example, it corresponds to 80 percent of the mortgage lending value. The Purchase price as a basis accepted instead of the mortgage lending value.
It is important for the borrower to know that each bank determines the criteria for the determination itself. Anyone who carries out a loan comparison and compares the conditions of the banks with each other will find that the Conditions vary depending on the LTV can. The background is that the lender is just different procedures apply to set this metric for assessing creditworthiness. Therefore, the loan terms also vary from bank to bank. As a rule, German banks work less frequently with the ratio of loan to property value used in an international context. For the lender in Germany, the mortgage lending value is more important, it is decisive for the loan interest.
German banks work with the mortgage lending value
A lender asks for security to approve the loan. Usually a Land charge in the land register registered. Based on the land charge, the lender has the right to demand the sale of the property in order to pay the loan from the purchase price if the borrower is permanently in default with the repayment. That is why a bank is interested in getting a credit check long-term property value to apply. This long-term real estate value is the Mortgage lending value. This value is set before the loan is granted. With the help of the mortgage lending value, the bank sets the maximum amount up to which it lends the property and thus uses it as security for the financing. As a rule, banks only grant loans in an amount below that Lending Limit. A loan of 100 percent or even more is possible, but the bank usually charges a higher interest rate. A distinction is to be made between the mortgage lending value Lending period. It is defined as the ratio of the loan granted and the mortgage lending value in percent.
Example: This is what practice looks like
A loan of 130,000 euros is required for construction financing. In addition, there is a loan from the Kreditanstalt für Wiederaufbau in the amount of 50,000 euros. The total required Financing requirement is therefore 180,000 euros. With an assumed mortgage lending value of the property, the lending period results from the ratio of the two loans to the mortgage lending value in the order of magnitude of 0.6, i.e. 60 percent. Under these premises, the property will consequently be loaned to 60 percent. In theory, the loan could even be increased if a loan is required for modernization measures. The loan-to-value ratio could then be increased to 70 percent or 80 percent.
It should be noted, however, that the amount of the building interest depends on the ratio of the loan to the property value. The higher this ratio, the greater the bank's risk. You will get this financing risk compensated by a higher loan interest. With a loan of 60 percent the selection among the financing banks is usually the greatest. The borrower then usually has a wider range of lenders available and can choose the most attractive offer.
With a loan of 80 percent or even 100 percent looks different. Few lenders in Germany are willing to accept such a high loan. In return, they become significant Safety surcharge to raise interest. This makes the financing considerably more expensive. Therefore every borrower should try as much equity as possible to be brought into real estate financing in order to keep the loan on the property manageable and to be able to finance it on favorable terms.
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