What is the loan-to-value (LTV) ratio indicative of?

The loan-to-value (LTV) ratio is primarily indicative of the overall risk associated with a mortgage loan. It represents the relationship between the amount of the loan and the appraised value of the property securing that loan. A higher LTV ratio suggests that a borrower is financing a larger portion of the property's value, which increases the lender's risk. This is because if the borrower defaults, there may not be sufficient equity in the property to cover the outstanding loan balance through a potential foreclosure sale.

Conversely, a lower LTV indicates that the borrower has more equity in the property, which generally reduces the lender's risk. This is why lenders often use the LTV ratio as a key factor in determining the terms of the mortgage, such as interest rates and the requirement for private mortgage insurance (PMI).