In the investment description you see that the loan is secured by property. You know the interest rate. But you need one more number: LTV. A comparison of the loan amount and the value of the property. So that you can estimate whether, in case of problems, the loan would be repaid by selling the property.

If the pledged property is worth CZK 10 million and the loan amount is CZK 5.5 million, the LTV of the loan is 55 %. At the moment of valuation the loan amount thus corresponds to 55 % of the value of the property.

Thanks to LTV you can quickly form an idea of the relationship between the loan and the asset securing it. We describe how it is calculated, what the difference is between 55, 70 and 90 %, and what happens to LTV when the value of the property falls.

LTV simply: how much of the property's value the loan represents

LTV is an abbreviation of the English Loan to Value, that is the ratio of the loan to the value of the pledged property. The Czech National Bank (ČNB) defines it as the percentage ratio of the loan amount to the value of the property securing the loan. That sounds rather legal.

For an investor, the practical meaning is what matters most. An LTV of 55 % says that the creditor is lending an amount corresponding to 55 % of the value of the pledged property at the moment of valuation.

How to calculate LTV in a few seconds

The calculation is simple. You divide the loan amount by the value of the pledged property and multiply the result by one hundred.

5,500,000 ÷ 10,000,000 × 100 = 55 %

For a property worth CZK 10 million and a loan of CZK 5.5 million, the LTV therefore comes out at 55 %.

For every CZK 100 of the value of the pledged property there is therefore, at the moment of valuation, CZK 55 of loan.

LTV of 55 %, 70 % or 90 %: what is the difference?

It is best seen on the same property with differently sized loans. Let us imagine that the flat or house in pledge is worth CZK 10 million in all three cases.

As LTV rises, the difference between the value of the pledge and the loan amount at the moment of valuation therefore shrinks. At a lower LTV this difference is larger. The lower the LTV, the higher the expected price of the property relative to the debt, and therefore the more likely it is that in case of repayment problems the debt can be repaid in full.

Does an LTV of 55 % automatically mean a 45 % buffer?

At an LTV of 55 % the loan amount thus comes out 45 % of the property's value below its determined value at the moment of valuation. Describing the whole 45 % as a guaranteed buffer would, however, be misleading.

The value of a property can change over time. A valuation captures its value at a particular date, and the future sale price may be different.

What a fall in the property price does to LTV

Let us return to our example: the loan is CZK 5,500,000 and the original value of the property is CZK 10,000,000. The initial LTV is therefore 55 %.

• If the value of the property falls by 10 % to CZK 9,000,000, the LTV rises to approximately 61.1 %.
• If the value of the property falls by 20 % to CZK 8,000,000, the LTV rises to 68.75 %.

The loan is still the same size in both cases. What changes is the value of the asset securing it, and with it the resulting LTV.

What LTV does Benkee state?

Benkee currently states on its website an average LTV of financed loans of around 55 %. This is an average across financed loans. For a specific investment it is therefore important to look at its own parameters and LTV. It is precisely the specific figure that lets you quickly find out what the relationship is, for a given loan, between the amount of financing and the value of the pledged property.

LTV in brief: questions and answers

Is there a maximum LTV permitted by the ČNB? Yes. The ČNB limits mentioned in this article concern consumer loans secured by residential property. For loans to acquire one's own housing the upper LTV limit is 80 %, and for applicants under 36 acquiring their own housing 90 %. Providers may go above these limits only in a limited volume set by ČNB rules. These rules do not apply to loans offered for investment through Benkee.

Is LTV the same as the overall risk of an investment? LTV describes the relationship between the loan amount and the value of the pledge as at the valuation date. The overall risk also involves other factors, for example the borrower's creditworthiness, the quality of the valuation or the liquidity of the property.

Can LTV change even if the loan amount stays the same? Yes. If the value of the pledged property changes, the ratio between its value and the loan amount changes too. In our example, when the value of the property falls from 10 to 8 million CZK, the LTV rises from 55 % to 68.75 %.

Why does Benkee publish the LTV of its loans? LTV is one of the specific indicators that can be used to describe the security of a loan. Thanks to it, an investor sees what the relationship is between the loan amount and the value of the property securing it.

If you are interested in what LTV current investment opportunities have, take a look at the offer of loans on the Benkee website.

Sources used

• Czech National Bank – definition and limits of LTV: https://www.cnb.cz/cs/financni-stabilita/makroobezretnostni-politika/stanoveni-horni-hranice-uverovych-ukazatelu/ltv/index.html
• Benkee website (bankee.cz): https://www.bankee.cz/