Loan to value (LTV) ratio is a financial term used mainly by lenders to express the loan values to assets values. It is communicated in terms of ratios calculated by taking Total Loan Value/Total Asset Value.
This ratio communicates how risk in a given loan because the higher the loan value ratio the riskier it is. It means that should the client default the loan might not be recovered due to lower value of assets as compared to loan value.
The ratio as being used to analyze the risk profile, will also be used by insurers when issuing you with mortgage insurance or when banks are approving loans. The higher loan-to-value ratio might lead to company or a person incurring higher borrowing costs and/or property portfolio holding costs.
The ratio can tell you another side of the coin. How much of the assets you truly own, the net equity portion. The higher the ratio, the less ownership you have in a portfolio.The increase of a loan to value will most likely make the assets portfolio not attractive to potential investors, lenders and analysts in a case of listed funds.
In recent time, we have seen a listed REIT by the name of Rebosis going through restructuring due to their high Loan-to-value ratio. They are currently attempting to bring their LTV ratio TO below 40% as it IS considered to be a favourable position by the property sector analysts.
The implication of high loan to value ratio including other unfavourable factors has seen their share price losing more than 78% year to date.
The current Rebosis LTV ratio is known to be around 57% with potential to go below 55% if the Mdantsane Mall disposal to Vukile property fund goes ahead. Rebosis has put three malls up for sale including Mdantsane Mall in order to reduce their loan to value ratio.
Vukile has previously expressed an interest in purchasing Rebosis three malls, Bloedstreet Mall and Sunnypark Shopping Centre including Mdantsane Mall but only decided to go ahead with the latter.
How to calculate Loan to Value:
Assume you want to buy a property worth R100 000, you then put down R20 000 as a deposit. You then take out the mortgage bond of R80 000.
The loan to value ratio will equal: 80000/100000=0.8
Why it matters and companies like Rebosis trying to contain it below 40%:
A loan to Value ratio is used by lender to evaluate risk and the higher they lend it means they are taking more risks. With higher loan to value in property portfolio, you are likely to:
• To find it harder to get loans approvals.
• You are likely if approved for loans, to pay higher borrowing costs.
• You will pay more for portfolio costs such as mortgage insurance.
As a property investor, you will continuously be evaluating your LTV ratio as to contain operational costs and ensuring your ability to borrow is not hindered as a result of higher LTV.
If you have a property portfolio and will like to engage our service in assessing your portfolio performance, feel free to contact us.