The loan-to-value ratio (LTV) is a fundamental metric in real estate financing, representing the proportion of a property's appraised value that is covered by the loan. It's calculated by dividing the loan amount by the appraised value of the property and is typically expressed as a percentage. For example, a $500,000 commercial mortgage on a property appraised at $1 million results in an LTV of 50% ($500,000 / $1,000,000 = 0.50 or 50%).
A lower LTV is generally viewed by lenders as indicating a lower risk of default, as the borrower has more equity invested in the property. This reduced risk can often lead to more attractive loan terms, such as lower interest rates and less stringent requirements. Lenders establish maximum LTV thresholds to manage their exposure. It's important to remember that while LTV is a significant factor, the final terms of a commercial mortgage are also influenced by the borrower's creditworthiness, the strength of their business financials, and the size of their down payment.