What is Loan To Value (LTV) and why is it relevant?

The month of September 2008 will go down in history as the international banking system declined. On September 15th, Lehman Brothers fell. Undoubtedly this date marks a before and after in the financial institutions and in their regulation. Institutions and regulatory bodies, had to take action for what was coming.

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What is the Loan To Value?

Loan to Value (LTV), is a mortgage information ratio introduced in Spain in 2008. Specifically, this ratio measures the percentage of debt over the value of the property. To be more exact, the value of the property according to the last valuation made.

For example:

A loan of 200,000 euros guaranteed with a property valued at 220,000 euros would have a LTV of 90.90%.

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The new Mortgage Law (2019)

One of the most relevant innovations of the new Mortgage Law is that one of the obligations of the Banks is to ensure that the client is solvent.

Why this request for information?

In 2008, in the midst of the real estate boom, the Bank of Spain published Circular 6/2008. This Circular established, among other things, new information requirements on the mortgage market for Spanish financial institutions.

Therefore, every six months since that year, financial institutions must provide specific information on the mortgage loans granted. This information (detailed below) should be segmented according to the LTV of each loan granted.

What information do financial institutions provide?

Spanish financial institutions must report on the volume of their mortgage transactions indicating:

• Type of guarantee: whether it is a first mortgage or a later ranking mortgage.
• Purpose of the loan: if it is for the purchase of a first home, in the case of natural persons. Or in the case of business loans, real estate development, or leasing, in the case of legal persons.
• Type of borrower: whether natural or legal persons.

As we said, this information is provided segmented by the LTV of each mortgage loans granted. Thus, four qualifying ranges are established:

• Information on mortgage loans whose LTV is less than 50%.
• Information on mortgage loans whose LTV is between 50% and 80%.
• Information on mortgage loans whose LTV is between 80% and 100%.
• And finally, the information on mortgage loans which LTV exceeds 100%.

What does this information provide?

This new information, which financial institutions are obliged to provide, makes it possible to know or weigh up their mortgage risk.

Likewise, it has allowed us to know if the financial institutions have changed their policies on granting mortgages, after the strong crisis suffered in our country. It should be noted that this information has been required since the last six months of 2008. No data is available prior to that date. The first concrete data (not based on estimates) come from the first quarter of 2009.

This information requirement, in turn, makes it possible to know the quality of the loans granted. The lower the LTV is, the better the quality and the less risk of default would be.

Not only does it offer information on risk or solvency, but it also provides information on the mortgage business of financial institutions. It shows whether a particular bank has a greater concentration in individual consumer sectors or whether it is more concentrated in business lending.

What are the data in Spain?

As we said, in Spain this data has been reliably obtained since 2009.

The first data provided showed that mortgage-backed transactions amounted to 1.1 trillion euros. This figure represented 63.5% of the total volume of funding granted. More than half of this amount was granted to individuals. Mainly they were for the purchase of first homes.

In 2017, mortgage loans for home purchases remain the most significant item. Reaching almost 500,000 million Euros at the end of the year.

The average LTV value closed in 2017 at 65%. Around 14% of the loans granted had an LTV greater than 80%.

Conclusions

The banking crisis that exploded with the real estate boom in Spain introduced information requirements to financial institutions. Among them is the aforementioned LTV.  A ratio that measures, among other things, the quality of the mortgage debt.

Since 2008, all financial institutions have been obliged to provide information on their mortgage products. Specific and disaggregated information, which makes it possible to measure the type of debt and the measures for granting it.

After the analyses made by different experts, the reference threshold of the LTV, in Spain, is at 80%. Therefore, any loan granted above this threshold carries a higher risk of default.

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