When applying for a home loan or vehicle finance, one of the most important metrics that lenders use to assess risk is the loan-to-value ratio (commonly referred to as LTV). This ratio plays a key role in determining whether a loan application is approved, the interest rate charged, and the size of the deposit required from the borrower. Understanding how the loan-to-value ratio works can help borrowers make better financial decisions and improve their chances of loan approval.
What Is the Loan-to-Value Ratio?
The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of the asset being purchased. It is commonly used in secured lending situations, such as mortgages or vehicle loans.
The formula for calculating the loan-to-value ratio is:
LTV Ratio = (Loan Amount / Appraised Value of the Asset) x 100
This ratio is usually expressed as a percentage. For example, if a borrower applies for a R800,000 loan to purchase a home valued at R1,000,000, the LTV ratio would be:
(800,000 / 1,000,000) x 100 = 80%
Why the Loan-to-Value Ratio Matters
Lenders use the loan-to-value ratio to assess the risk associated with a loan. The higher the LTV ratio, the more risk the lender takes on, because the borrower is financing a larger portion of the asset’s value.
Here’s why it’s important:
1. Risk Assessment for the Lender
A high LTV ratio means the borrower has little equity in the asset, which increases the lender’s risk. If the borrower defaults, the lender may struggle to recover the full loan amount through resale.
2. Affects Loan Approval
Lenders often have LTV thresholds. If the LTV ratio is too high, the lender may decline the application or require additional conditions such as a higher deposit or co-applicant.
3. Determines Interest Rates
Loans with higher LTV ratios usually attract higher interest rates, as the lender adjusts the rate to reflect the increased risk.
4. Influences Deposit Requirements
A lower LTV ratio typically means a higher deposit from the borrower. For example, if a bank allows a maximum LTV of 90%, the borrower must contribute 10% of the asset’s value as a deposit.
Ideal Loan-to-Value Ratios by Loan Type
Different types of loans have different acceptable LTV ratios. These can also vary from one financial institution to another. Below is a general guide for typical LTV ranges in South Africa:
| Loan Type | Ideal LTV Ratio | Notes |
| Home Loans | 70% to 90% | 100% loans are rare; most lenders require 10–20% deposit |
| Vehicle Finance | 70% to 80% | Based on trade-in value or purchase price |
| Business Loans | 60% to 80% | LTV may be lower due to higher perceived risk |
How to Improve Your Loan-to-Value Ratio
Improving your LTV ratio can increase the chances of loan approval and may also lead to more favourable interest rates. Here are ways to achieve a better LTV ratio:
1. Increase the Deposit
The most direct way to improve your LTV is by increasing the size of your deposit. This reduces the loan amount relative to the asset value.
2. Choose a Lower-Priced Asset
Opting for a property or vehicle with a lower purchase price relative to your loan qualification can improve your LTV ratio.
3. Enhance the Value of the Asset
In some cases, improving the condition or features of the asset (particularly for property) may increase its appraised value, thereby lowering the LTV.
4. Avoid Rolling in Extra Costs
Avoid including registration fees, insurance, or taxes in the loan amount. These extras increase the total loan without increasing the asset value, raising your LTV ratio unnecessarily.
LTV Ratio and Property Loans
In the context of property, the loan-to-value ratio is particularly crucial. Here’s how it plays out:
Home Loan Deposit Requirements
Most South African banks require a deposit of at least 10% of the property’s value, resulting in a maximum LTV of 90%. Some lenders may offer loans with 100% LTV, but these are typically restricted to first-time buyers with strong credit profiles.
Interest Rate Impact
Banks generally offer lower interest rates on home loans with LTVs below 80%. A borrower who pays a higher deposit reduces the bank’s risk and qualifies for better terms.
Loan Insurance
In cases where the LTV exceeds a certain threshold (typically 90%), the lender may require the borrower to take out loan protection insurance to cover potential losses in the event of default.
LTV Ratio in Vehicle Financing
Vehicle loans in South Africa are another common area where LTV applies. The LTV ratio here is based on the car’s retail or trade-in value as assessed by the bank or insurer.
Depreciation Factor
Since vehicles depreciate rapidly, lenders prefer a lower LTV ratio to ensure the car maintains value close to the loan amount during the early repayment period.
Balloon Payments and LTV
Some car loans involve balloon payments, where a large portion of the loan is deferred to the end of the term. While this can reduce monthly instalments, it may increase the LTV risk if the car’s value drops below the loan balance.
Regulatory Considerations in South Africa
South African banks must adhere to rules and guidelines issued by the National Credit Regulator (NCR) and South African Reserve Bank (SARB). These institutions monitor risk levels, including high LTV ratios, especially in the property sector.
During periods of economic uncertainty, lenders may lower their maximum acceptable LTV ratios to protect against rising default risks. This has been observed during recessions or housing market downturns.
Comparing LTV vs. Loan-to-Income Ratio
While LTV focuses on the value of the asset being financed, the loan-to-income (LTI) ratio considers the borrower’s income relative to the loan amount. Lenders often assess both ratios to determine the borrower’s overall creditworthiness.
| Metric | Focus | Impact on Loan |
| LTV Ratio | Value of the asset vs. loan | Assesses risk to the lender |
| LTI Ratio | Borrower’s income vs. loan | Assesses affordability |
Real-Life Example: Home Loan Scenario
Let’s consider a practical example to demonstrate how the LTV ratio affects a mortgage application:
- Property Price: R1,000,000
- Borrower Deposit: R150,000
- Loan Amount Requested: R850,000
LTV = (850,000 / 1,000,000) x 100 = 85%
In this case, the LTV ratio is 85%, which is within acceptable limits for most banks. The borrower may qualify for a competitive interest rate and standard loan terms.
Now consider a borrower offering only R50,000 as a deposit:
- Loan Amount: R950,000
- LTV = 95%
This higher LTV may lead to stricter loan terms, higher interest rates, or even denial of the application if the borrower’s credit score or income doesn’t support the risk.
