# Covered Bond Loan-to-value (LTV)

### Richard Kemmish

30 years: Capital markets & covered bonds

The loan-to-value, or LTV, of a mortgage is one of the most intuitive measures of the riskiness of a loan. Here, Richard explains some of the variations of applying an LTV rule and some of the ways to calculate it.

The loan-to-value, or LTV, of a mortgage is one of the most intuitive measures of the riskiness of a loan. Here, Richard explains some of the variations of applying an LTV rule and some of the ways to calculate it.

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### Covered Bond Loan-to-value (LTV)

9 mins 40 secs

Overview

The loan-to-value (LTV) is the ratio of the size of the loan to the value of the property securing it. It is a useful measurement of the riskiness of a loan. As such, it is the basis of covered bond ratings, investor analysis and covered bond ratings in every country.

Key learning objectives:

• Define LTV and learn how to calculate it

• Identify what LTV ratios tell you and identify its uses

• Discuss the different ways to measure value

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Summary

#### How do we calculate the LTV ratio?

LTV = Loan Amount/Value

#### What do LTV ratios tell us?

• How likely it is that the borrower will default
• How much the lender might lose in the case of default

#### How do we measure value?

• Market Value – The price at which the property would be sold if it were sold properly today. This typically means the value at which it was last sold, adjusted for movements in property prices.
• Mortgage Lending Value – A formulaic way to arrive at the property’s value, stripping out the more volatile aspects of the property market.
• Prudent Market Value
• Foreclosure Value
• Lesser of the MLV or the updated MV

#### Can property values be ‘marked to market’?

If house prices were to rise by 10%, can this value be applied to assets already in the pool and therefore borrow more against it? Some countries allow the increase in value to be reflected in the recalculation of properties already in the pool. The CRR says banks need to revalue real estate, used as collateral, a minimum of once every year and once every three years for commercial and residential properties respectively.

#### What are the uses of the LTV ratio?

• Hard limit: Any mortgage with a loan-to-value ratio over that limit is excluded from the cover pool
• Soft limit: The mortgage can be included, but we are only going to give it credit up to that LTV number for the purposes of calculating the value of the cover pool

#### When is the LTV limit applied?

• Hard limit:  If breached, kicks the mortgage out of the pool – is only applied when the mortgage is first included in the pool
• Soft Limit: Is typically applied not just at the inclusion of the loan in the pool, but over its entire life