What is the Loan-to-value ratio (LTV)?

What is the Loan-to-value ratio (LTV)?

The loan-to-value (LTV) ratio is a critical metric used in lending to assess risk and determine financing terms. It compares the amount borrowed to the value of the asset or collateral. A lower LTV ratio is favorable as it indicates a larger down payment and lower risk for lenders. Lenders often offer better terms for borrowers with lower LTV ratios, such as lower interest rates.

How to Calculate LTV

Calculating the LTV ratio involves dividing the loan amount by the appraised value of the asset, expressed as a percentage. For example, if a property valued at $100,000 has a $90,000 loan, the LTV ratio is 90%.

Lenders typically prefer LTV ratios below 80% to mitigate risk, but some may consider higher ratios based on factors like income and creditworthiness.

In commercial lending, the collateral value is crucial in determining the loan-to-value ratio. Collateral value refers to the fair market value of assets securing a loan. Lenders use various methods to estimate collateral value, such as appraisals and reviewing comparable transactions. The size of a secured loan relative to its collateral value is known as the LTV ratio, with lenders usually providing loans ranging from 70% to 90% of collateral value.

Understanding the LTV ratio is essential for borrowers to assess their borrowing capacity, eligibility for loans, and potential costs. Maintaining a reasonable LTV ratio can lead to more favorable borrowing terms and lower financial risks for both borrowers and lenders.

Importance of LTV Ratio

Risk Management:
The LTV ratio serves as a risk management tool by limiting the amount that can be borrowed relative to the value of collateral. It helps mitigate potential losses for lenders and borrowers.

Market Efficiency:
By setting appropriate LTV ratios, Term Structure promotes market efficiency by balancing liquidity provision with risk management. Users can access funds while maintaining platform stability.

User Protection:
The LTV ratio safeguards users' interests by preventing excessive borrowing that could lead to default or liquidation events. It ensures responsible lending practices within the protocol.

Loan-to-Value Ratio in Term Structure

The LTV ratio in Term Structure represents the percentage of the collateral's value that users can borrow. It determines the maximum borrowing capacity based on the value of the underlying assets provided as collateral.

Supported Assets:
The Term Structure protocol supports various tokens for collateral and borrowing, including ETH, wBTC, USDT, USDC, and DAI. Each token has specific LTV ratio requirements to govern borrowing limits.

LTV Ratio Limits:
For collateral pairs involving wBTC or ETH, users can borrow up to 75% of the value of their collateral based on the LTV ratio. Stablecoin-pair loans, which involve stablecoins like USDT, USDC, and DAI as both collateral and borrowed tokens, have an LTV ratio of 90%.

Capital Efficiency:
The LTV ratio influences capital efficiency within the protocol by determining how much users can borrow against their assets. Higher LTV ratios allow users to access more liquidity but come with increased risk.

Liquidation Mechanism:
To protect lenders' returns and maintain platform stability, Term Structure implements a liquidation mechanism when borrowers fail to repay their loans by maturity. 

This mechanism ensures that lenders are compensated in case of significant drops in collateral value.

In conclusion, the Loan-to-Value (LTV) ratio is a fundamental metric in lending that informs borrowing limits, risk management strategies, and platform stability.