Loan-to-value is the first number any mortgage investment will show you, and with good reason: it is the clearest single measure of how much room there is between what is owed and what the security is worth. It is also the number most easily presented in a way that is technically true and practically misleading. This article covers how to compute it honestly, and what to look for when someone else has computed it for you.
The calculation, and the part people get wrong
Loan-to-value is the debt secured against a property divided by the property's value. On a first mortgage with nothing else registered, it is straightforward. A $600,000 first charge against an $800,000 property is a 75% loan-to-value.
The error appears the moment there is more than one charge. An investor evaluating a second mortgage frequently looks at the second in isolation — a $80,000 second against an $800,000 property reads as 10%, which sounds extremely safe. It is not 10%. What matters is everything that recovers ahead of you, plus your own position, against the value.
| Amount | Running total | LTV at this position | |
|---|---|---|---|
| Property value (appraised) | $800,000 | — | — |
| First mortgage | $560,000 | $560,000 | 70% |
| Second mortgage (your investment) | $80,000 | $640,000 | 80% |
Your $80,000 second sits at an 80% combined loan-to-value, not 10%. The property has to fall by more than 20% before your position is impaired — and in a forced sale, the costs of getting there come out of the proceeds before anyone is paid. This is the single most common misreading in private mortgage investing, and it is entirely avoidable.
Three ways a reported LTV can flatter a portfolio
1. The appraisal basis
An appraisal can be written on an as-is basis, meaning what the property is worth today, or on an as-complete basis, meaning what it would be worth once planned construction or renovation is finished. A loan-to-value computed against an as-complete value on a property that has not been completed is describing a future that may not arrive.
This distinction is not academic. It is precisely the issue securities regulators targeted when they reformed the rules for syndicated mortgage offerings, which now require an appraisal from an appraiser independent of the issuer, giving fair market value without considering improvements or development. If a loan-to-value looks unusually comfortable for the risk being described, the appraisal basis is the first thing to check.
2. The age of the valuation
A loan-to-value is a snapshot against a valuation taken on a particular day. On a portfolio holding mortgages written over two or three years, some of those valuations are old. In a flat market that matters little. In a falling one, a book reporting a 65% weighted-average loan-to-value against valuations largely struck eighteen months earlier is reporting something other than its current position.
3. Weighted average, and what an average conceals
A weighted-average loan-to-value of 62% can describe a book where every mortgage sits near 62%, or a book where most sit near 50% and a handful sit above 85%. Those two portfolios have very different loss profiles, and the average does not distinguish them. What distinguishes them is the distribution.
So the useful question is not "what is your average LTV" but "what proportion of the book sits above 75%, and above 85%". A manager who tracks their book properly will have that answer. The question is also a reasonable proxy for how closely a manager watches their own concentration.
What a good loan-to-value looks like
There is no single answer, because the number only means something alongside three other facts.
- Position. A 75% first and a 75% combined second are not comparable risks. The second recovers only after the first is paid in full, and in a shortfall it absorbs the loss first.
- Marketability. A 70% loan-to-value on a semi-detached house in a large centre and a 70% on rural acreage are different exposures, because the time to sell differs and carrying costs accrue while you wait.
- Property type. A one-bedroom condominium in a building with many similar units for sale is slower to move than the appraisal suggests. This is why ceilings on condominiums are routinely tighter.
Loan-to-value tells you how much cushion exists. Marketability tells you how long it takes to reach the cushion, and how much the journey costs. Both matter, and only one of them appears on a fact sheet.
Questions worth asking
- Is this loan-to-value computed on a combined basis, including everything registered ahead of the position?
- Is the appraisal as-is or as-complete, and who instructed the appraiser?
- How old is the valuation behind this figure?
- What share of the portfolio sits above 75%, and above 85%?
- How long would this property take to sell at the appraised value?
Loan-to-value measures the cushion. Marketability measures how long it takes to reach it, and what the journey costs. A portfolio reporting only the first number has told you half the story.
Questions investors ask
What is a good loan-to-value for a mortgage investment?
It depends on position, marketability and property type, so there is no single figure. A first charge at a given ratio is a different exposure from a second at the same combined ratio, and the same ratio on a rural property is a different exposure again. Treat any answer given as a single number with suspicion.
How do I calculate loan-to-value on a second mortgage?
Add everything registered ahead of your position to your own amount, then divide by the appraised value. A modest second behind a large first can sit at a high combined ratio — this is the calculation investors most often get wrong.
What is the difference between as-is and as-complete appraised value?
As-is is what the property is worth today. As-complete is what it would be worth once planned work is finished. A loan-to-value computed on an as-complete value describes a property that does not yet exist, and it is the issue securities regulators addressed when reforming syndicated mortgage rules.
What does weighted-average LTV tell me about a portfolio?
Less than it appears to. An average cannot distinguish a tightly clustered book from one with a safe majority and a risky tail. Ask instead what proportion of the book sits above 75% and above 85%.
Does a lower loan-to-value mean a safe investment?
It means more cushion, not safety. A low ratio on a property that takes a year to sell, in a position that recovers second, after enforcement costs, can still produce a loss. Loan-to-value is one input among several.