Lending period

LTV is a term from the lending business of banks , namely, the quotient of the amount of the loan and mortgage value of a credit security . It is intended to represent the collateral risk of a particular loan .

General

The lending period is mathematically related to the lending value and the lending limit in the context of the collateral assessment when lending against loan collateral . While the lending value - based on the market or market value - represents the theoretical maximum lendability of a loan security, the total credit risk is represented with the loan-to-value ratio compared to the loan security. When lending against real estate value ratio represents the ratio of all debt financing (also known as prior charges in favor of other creditors registered liens ) on the mortgage lending value of the mortgaged property.

The loan-to-value ratio is given as a percentage of the loan-to-value ratio. The lower the calculated percentage, the lower the risk of loss for the lender that arises from the realization of the collateral after a potential default by the borrower . The benchmark for the loan-to-value ratio is the percentage loan-to-value limit that has been set for a certain type of collateral. As a rule, a loan is only justified in terms of its absolute amount if the loan-to-value ratio is not higher than the loan-to-value limit.

example

A bank grants the owner of a residential property a loan of EUR 17 million. The market value of this property, which serves as a loan security, is EUR 22 million, while the bank has set the lending value at EUR 20 million. Then the (initial) LTV for this loan is 85% of the LTV. From the bank's point of view, this is a relatively high credit risk because the lending limit for residential buildings at banks is usually 80% of the lending value (in the case of real estate loans, it is only 60%). The loan-to-value ratio of 85% now signals that the risk is 5 percentage points or even 6.25% (relative) above the bank's internal loan-to-value limit. By subsequent repayments then the initial LTV decreases, because - while maintaining a constant loan value - reduce the lending risk.

In the example, if the residential building is already encumbered with a first-class land charge of EUR 1 million in favor of another bank, the loan-to-value ratio would deteriorate to 90% according to the following formula:

${\displaystyle {\text{Beleihungsauslauf}}={\frac {{\text{kapitalisierbare Vorlasten}}+{\text{eigenes Darlehen}}}{\text{Beleihungswert}}}}$

The reason for the mortgage lending risk, which is estimated to be even higher, is that in the event of a foreclosure sale of the property, the subordinate bank would have to act as the operating creditor and thus the primarily secured bank is entitled to the first million in the distribution of the proceeds from the sale . Only then will the remainder of the proceeds be transferred to the subordinated bank. This distribution risk in favor of primarily secured creditors must be taken into account in the lending period in order to represent the entire lending risk.

Financial regulatory regulations

The Capital Adequacy Ordinance (CRR), which has been in force since January 2014, introduces a reciprocal loan-to-value ratio . For the default loss rate (LGD) in the basic IRB approach, the values ​​specified by the banking supervisory authority apply . Loans that meet the minimum requirements and for which the ratio of the value (= lending value) of the collateral to the nominal amount of the loan falls below the threshold of 30% (= reciprocal loan-to-value ratio ), the LGD for unsecured loans or in the case of non-eligible collateral is in Allocated to the amount of 50% because the disposal costs could exceed the disposal proceeds. Loans where the ratio of the value of the collateral to the nominal amount of the loan is between 30% and 140% are assigned an LGD of 50%. Loans where the ratio of the value of the collateral to the nominal amount of the loan exceeds 140% receive an LGD of 40%. ${\displaystyle C}$ ${\displaystyle E}$ ${\displaystyle B}$

The following applies:

${\displaystyle {\text{B}}={\frac {\text{C}}{\text{E}}}}$

For commercial and residential properties different regulations. Retail real estate receives an LGD of 10% and commercial real estate of 15% (Art. 164 Para. 4 CRR). A LGD of 45% is assigned to senior unsecured loans (Art. 161 para. 1a CRR), subordinated blank loans of 75% (Art. 161 para. 1b CRR), the term is uniformly assumed to be 2.5 years (Art. 162 para. 1 CRR).

According to Section 14 of the Pfandbrief Act , Pfandbrief banks can only use real estate financing within the top 60% of the determined mortgage lending value of a property as cover for mortgage Pfandbriefe (mortgage lending limit). This limit applies regardless of whether the mortgage is used for residential or commercial purposes . Loans with a loan-to-value ratio of more than 60% can be included in the cover pool for Pfandbriefe , but only the first-rate part up to the 60 percent limit is taken into account for the cover calculation, since in the event of insolvency of the Pfandbrief bank, the Pfandbrief creditors have priority over the loans the first-rate 60 percent limit is limited. The Pfandbrief banks are obliged to regularly determine and report the average loan-to-value ratio for the cover pool of their mortgage Pfandbriefe.

For small insurance companies (under the Solvency I regime ) and pension funds in Germany, the lending limit of 60% applies to mortgages and land charges.

Effect on the credit terms

A loan whose loan-to-value ratio is within the lending limit can be granted at normal conditions because of the average credit risk resulting from the loan security . There are more favorable conditions for loans against risk-free collateral (pledging of bank balances or government bonds with a high credit rating ). By contrast, a loan with a loan-to-value ratio of 100% is more expensive because real estate, for example, lacks equity and the bank's credit risk is higher.

International representation

The term loan-to-value ratio (LTV), which is common in the English-speaking world, only takes into account the ratio of the loan amount to the market or market value of a property. In the English-speaking banking sector, the lending value is called loan-to-value cap .

Web links

• Lending period Entry in the Baugeld-Lexikon of the Süddeutsche Zeitung

Individual evidence

1. ↑ Thomas Söhlke, Regulatory Recording of Credit Risk , 2002, pp. 160 ff.
2. ^ DG Hyp, The German Pfandbrief Market 2015/2016 , September 2015, p. 30.
3. ^ DG Hyp, The German Pfandbrief Market 2015/2016 , September 2015, p. 36.
4. ↑ Circular 11/2017 (VA). BaFin , December 12, 2017, accessed on May 29, 2019 (Section B.4.1 let. C). 
5. ^ Kai Oppel / Sven Radtke, Immobilienfinanzierung , 2011, p. 66.