What is loan-to-value (LTV)?

The term loan-to-value (LTV) describes the relationship between the amount of a loan and the value of the secured asset, typically the purchase price of a property in the property context. A low LTV value indicates a low risk for the lender, while a high LTV value potentially harbours higher risks.

How is the LTV value calculated?

The loan-to-value ratio is calculated using the following formula:

• LTV = (loan amount / property value) * 100%

For example, if you buy a property worth AED 500,000 and take out a loan of AED 400,000, the LTV will be

• LTV = (400,000 / 500,000) * 100% = 80%

Why is the LTV important?

The loan-to-value ratio is a crucial factor for lenders as it is an important indicator of risk. A low LTV can lead to better interest rates and terms, while a high LTV can often result in higher interest rates as the lender is taking on more risk.

Advantages of a low LTV:

• More favourable loan terms
• Higher likelihood of getting the loan approved
• Fewer property insurance requirements

Disadvantages of a high LTV:

• Higher interest rates
• Increased property insurance costs
• Less room for negotiation

LTV and property financing in Dubai

In Dubai, the loan-to-value ratio is particularly relevant as many buyers finance property through mortgage loans. The property valuation plays a central role in determining the property value, on the basis of which the LTV is calculated. In recent years, LTV requirements in Dubai have evolved, with new-build properties often considered less risky, which can be an advantage for buyers of new-build projects.

What influences the LTV?

The LTV level is influenced by various factors including:

• The purchase price of the property or its market value
• The amount of the loan
• The type of financing (e.g. bank loans, private loans)

Conclusion

To summarise, loan-to-value is a crucial factor for property financing in Dubai and significantly influences the terms that borrowers receive from banks and other financial institutions. A low LTV is advantageous for buyers as it often leads to better conditions.

Illustrative example on the topic: Loan-to-value (LTV)

Imagine Ahmed wants to buy a flat in the famous Dubai Marina that costs AED 1,000,000. He has saved AED 200,000 for a deposit and applies for a loan of AED 800,000. The LTV in this case is calculated as follows:

• LTV = (800,000 / 1,000,000) * 100% = 80%

Since the LTV is 80%, the bank would see some risk and may offer a higher interest rate on the loan. Ahmed could get better financing by making a higher down payment or choosing a favourable real estate agency. He should also have a property valuation done to make sure the price is reasonable.