What does the term 'loan-to-value ratio' (LTV) refer to in banking?

The term 'loan-to-value ratio' (LTV) is a key financial metric used in banking, particularly in mortgage lending. It indicates the ratio of a loan amount to the appraised value or purchase price of the asset being financed, usually a property. This measurement helps lenders assess the risk of providing a loan; a lower LTV suggests that the borrower has more equity in the property, which reduces the lender's risk in the event of default.

Understanding LTV is crucial for determining the terms of a loan, such as interest rates and whether mortgage insurance is required. The higher the LTV, the riskier the loan may be perceived to be, which can influence the lending decision and the conditions attached to the loan. By assessing the relationship between the loan amount and the value of the asset, banks can make more informed lending choices and borrowers can better understand their financing options.