What factor is inversely related to the loan to value ratio (LTV)?

The loan to value ratio (LTV) is a financial term used to express the ratio of a loan to the value of an asset purchased. An important relationship to understand is that as the LTV decreases, the buyer's equity in the property increases.

When a buyer puts down a larger down payment, the amount of the loan compared to the total value of the property reduces, leading to a lower LTV. In this scenario, the buyer’s equity rises because equity is calculated as the difference between the property's value and the outstanding mortgage amount. Therefore, if the LTV ratio decreases because the borrower has invested more of their own funds, the equity they possess in that property increases, illustrating the inverse relationship.

In contrast, a higher LTV ratio indicates that the buyer has less equity, as they are financing a higher proportion of the property's value through a loan. This relationship is crucial for lenders who assess risk; lower LTV ratios are often seen as less risky because they indicate that the borrower has a greater stake in the property. Thus, understanding this relationship is vital for anyone involved in real estate financing.