Loan-to-value ratio

Loan-to-Value Ratio - The loan-to-value ratio (also known as the LTV) indicates the ratio of the loan amount to the appraised value of a property. It is expressed as a percentage and is one of the key metrics banks use to assess the risk of a mortgage. The lower the loan-to-value ratio, the more favorable the loan terms are generally.

Calculation and Thresholds

The formula is: Loan-to-Value ratio = (Loan amount ÷ Appraised value) × 100. The appraised value is not the same as the purchase price-banks typically set it 10-20% below the market value to cushion against market fluctuations and determine a sustainable value.

Important thresholds:

• Up to 60% loan-to-value ratio: Best interest rates - the senior mortgage within the so-called real credit limit. Mortgage bond banks may only issue mortgage bonds based on this senior collateral pool.
• 60-80% loan-to-value ratio: Interest rates rise moderately; most standard providers finance up to this limit without issue.
• 80-90% loan-to-value ratio: Risk premiums apply; some banks require term life insurance or increased principal payments.
• Over 90-100%: Only a few specialized institutions provide financing, usually with strict conditions and significant interest rate premiums. Full financing without equity is only possible with an exceptionally good credit rating and in prime locations.

Impact on the Financing Strategy

The loan-to-value ratio directly influences the interest rate, the loan approval, and the selection of potential lenders. Equity reduces the loan-to-value ratio and thus significantly lowers interest costs over the entire term. For a loan of 300,000 euros, the difference between a 60% and 90% loan-to-value ratio over 20 years can result in interest savings of 20,000 to 40,000 euros. The possibility of refinancing or debt restructuring also depends largely on the current loan-to-value ratio-those who have a favorable ratio after ten years of repayment are in a strong negotiating position with the bank.

Loan-to-Value Ratio and Risk Weighting Under Basel III/IV

Banks must back real estate loans with capital in accordance with the capital requirements of the CRR (Capital Requirements Regulation). The loan-to-value ratio determines the risk weight of the loan: up to an 80% LTV, a standard risk weight of 35% applies to residential real estate; above that, it increases. This regulatory requirement is the reason why banks charge higher interest rates for high loan-to-value ratios-they must hold more capital and pass the costs on to the borrower. Anyone who understands this understands why more equity not only provides security but also directly translates into lower interest rates.

Calculation Example: Loan-to-Value Ratio and Impact on Interest Rates

Property: Condo in Nuremberg-Maxfeld, purchase price €350,000, loan-to-value ratio €315,000 (90% of purchase price).

Equity	Loan	Loan-to-Value Ratio	Example Interest Rate	Monthly Payment (25 years, 2% principal repayment)
€35,000 (10%)	€315,000	100%	4.50%	€1,706
€70,000 (20%)	€280,000	89%	4.10%	€1,400
€105,000 (30%)	€245,000	78%	3.80%	€1,173
€140,000 (40%)	€210,000	67%	3.60%	€980

In this example, the difference between 10% and 30% down payment amounts to approximately €533 per month-over 25 years, this adds up to over €159,000 in additional costs due to higher interest rates and a longer repayment period.

Practical Tip for Buyers in Nuremberg

We recommend that buyers in the Nuremberg metropolitan area keep the loan-to-value ratio below 80% whenever possible. In Nuremberg, purchase prices for condominiums currently range from €2,500-4,000 per square meter and for single-family homes from €350,000-650,000 euros-a down payment of at least 20% plus closing costs (approx. 8-12%) thus requires substantial savings of at least 55,000 to 100,000 euros for an average apartment. Those with less equity should compare multiple banks, as interest rate premiums for high loan-to-value ratios vary significantly depending on the institution-an independent mortgage broker can identify substantial cost savings here.

Frequently Asked Questions

What is the difference between the loan-to-value ratio and the mortgage lending value?

The appraised value is the sustainable value of the property as determined by the bank-it is systematically lower than the market value, as it takes market fluctuations and long-term value trends into account. The loan-to-value ratio is the metric that compares the loan amount to this appraised value. Put simply: The mortgage value is the denominator, and the loan-to-value ratio is the result of dividing the loan amount by the mortgage value. A purchase price of €400,000 with a mortgage value of €360,000 and a loan of €320,000 results in a loan-to-value ratio of 88.9%.

Can the loan-to-value ratio change during the term of the loan?

Yes, as you make regular payments, the loan amount decreases, and with it, the loan-to-value ratio decreases continuously. At the same time, the mortgage lending value may increase or decrease due to market changes or renovation work. In the case of a refinancing, the loan-to-value ratio is recalculated using the current values-those who make payments in a rising market can achieve a significantly better loan-to-value ratio despite the same remaining debt and benefit from lower refinancing terms.

Do closing costs count toward the loan-to-value ratio?

Closing costs (real estate transfer tax, notary, real estate agent) increase the buyer’s financing needs but do not increase the property’s appraised value. Anyone who includes these costs in their financing significantly worsens their loan-to-value ratio without increasing the bank’s security. Banks generally expect that at least the incidental costs be paid from equity-those who cannot do so find themselves in a weak negotiating position. In Bavaria, incidental costs amount to 8-12% of the purchase price, which for a €400,000 property means €32,000 to €48,000.

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