The loan-to-value ratio (LTV) is an important metric when you’re considering commercial mortgages. It measures the relationship between the collateral or commercial real estate and the loan amount.
Commercial real estate lenders calculate the LTV to determine the proposed terms of the deal and the qualifications of a borrower.
Here’s a simple formula you can use.
LTV=Loan Amount/Appraised Value
The lower the LTV, the more competitive commercial rates and terms. At the other end of the scale, a higher LTV equals a higher risk. That means less advantageous terms whether you’re looking for land loans or to refinance.
What’s The Maximum LTV for Commercial Mortgages?
The ceiling for an LTV can vary depending on several different factors. Two of the biggest items are property type and tenancy. There are several different underwriting items that get included like the market, loan terms, debt yield, and the debt service coverage ratio (DSCR).
A variety of different factors come into play but at the top of the list is leverage. There are two different metrics used here — the loan-to-value ratio and the loan-to-cost ratio. They work on different things.
There is a difference between these. The loan-to-value ratio refinances loans and evaluates acquisitions. The loan-to-cost ratio determines how viable applications for construction loans are.
Lower Interest Rates With Lower LTVs
Here’s an example. An applicant might be buying a property worth $1 million that’s actually worth $2 million. The requested loan of $800,000 makes the LTC ratio 80% and the LTV ratio 40%.
Lenders usually offer lower interest rates with lower LTVs because they are less risky.
OMJ Mortgage Capital focuses on construction financing as well as commercial and land deals. We are a leading commercial mortgage broker in the GTA with awards. Let us help you find the product that will suit your budget and business needs today.
