Loan to value

The outstanding loan divided by the current value of the asset securing it.

Example

A 225,000 mortgage against a property that has fallen 20% to 240,000 is 93.75%, against 75.00% at purchase.

Important

The ratio moves because the denominator moves, not because more was borrowed - and it is usually the point at which a lender stops offering standard terms. Find the fall that takes you past it before buying, not at renewal.

Related terms

• Leverage — Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.
• Debt service coverage ratio — Net operating income divided by the annual mortgage payments. Below 1.00 the asset does not pay for its own borrowing.
• Forced selling — Selling because you have to rather than because you chose to - triggered by a lender, a redemption request, or an unrelated need for cash.

Lessons that explain it

• Appraising one loan: what backs it, how thin the cushion is, and who collects — Evaluating a loan means asking how the borrower repays, what happens if they cannot, how far collateral could fall before you lose money, and how reliable the lender or platform is at recovery. (13 min)
• Leverage runs both ways, the round trip costs six per cent, and selling takes months — A mortgage multiplies the price move by four in either direction. The transaction costs are fifty times a broad fund's. And the exit is measured in months, at a price you negotiate rather than accept. (13 min)
• The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)

All 578 terms in the Investing glossary