What does ‘loan-to-value ratio’ mean?

What does ‘loan-to-value ratio’ mean?

When you investigate loans on Max Crowdfund, you will come across multiple relevant concepts in the summary of the loans’ terms. One of those concepts is ‘loan-to-value’. For this reason, this concept is the term of this week. In this article, we will explain to you what it means.

The loan-to-value ratio indicates to what extent the loan amount covers the total value of the property. The ratio is expressed in a percentage. To calculate what percentage a loan represents of the relevant market value, it is important to determine the official value of the object. This happens according to the valuation report of an accredited appraiser. After the total market value is determined, it becomes possible to conclude the coverage value of the loan. This percentage is calculated by dividing the loan’s amount by the official value of the real estate and subsequently multiplying this outcome by 100.

A summary of the loan's terms, here you find the loan to value ratio

Why is this important?
This percentage provides insight into the size of the loan amount in relation to the entire market value of the object, according to the valuation report. The higher the percentage, the less difference exists between the two amounts.

When this difference is smaller, this offers more security to the investors of the particular loan. Therefore, it lowers the risks of investing. Should a situation occur in which the real estate is seized due to failures during the project, the property will be sold in order to repay every investor the money they are entitled to according to the loan’s terms. A lower percentage means the appraised value of the object is relatively high compared to the amount of money needed to give every investor their money back. The lower the loan-to-value ratio, the more room available in terms of adjusting the final sale amount of the property. This allows us to offer a lower sales price and still receive enough money to repay the entire loan.

Summarized: when the calculation results in a lower ratio, you as an investor will have a higher chance of retrieving your entire deposit if something goes wrong while realizing the real estate project. 

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