# What is Loan-To-Cost (LTC) Ratio?

The LTC ratio is used to determine the amount or percentage of a loan that the lender will issue for project financing on the basis of the construction costs.

## LTC Formula

The Loan-To-Cost (LTC) Ratio is calculated by dividing the Loan Amount by the Construction Cost to compare the financing amount with the cost of the property, expressed as a percentage.

## What Does the Loan-To-Cost Ratio Tell You?

The LTC ratio is used to determine the amount or percentage of a loan that the lender will issue for project financing on the basis of the construction costs. Following the completion of the construction, the project will be revalued.

The higher the LTC ratio, the higher the risk of the loan for the lender.  As such, most lenders have set LTC ratio limits for the amount they are willing to lend to finance the project. Most lenders have this capped at 80% of the total project cost. There are some exceptions providing higher LTC financing that come with a higher interest rate to make up for the increased risk to lenders.

However, the LTC ratio is just one factor used by lenders to evaluate the issuance of a loan, including the value and location of the project, as well as the loan and credit history of the potential borrower.

## Example on How to Use LTC ratio

Example of a \$200,000 project with an 80% LTC ratio.

Total Construction Cost \$200,000
Loan from lender \$160,000
LTC ratio \$160,000 / \$200,000 = 80%

In the example above, the LTC ratio is used to calculate the loan amount for a \$200,000 project. With a hard construction cost of \$200,000, an 80% LTC ratio comes to a loan amount of \$160,000, providing the borrower with equity in the project. This serves to motivate the borrower to bring the project to completion.

## What is Max LTC?

Lenders usually set a maximum loan amount based on the LTC ratio, as well as a maximum dollar amount. For example, a lender may set a maximum LTC of 80% or \$200,000, whichever is lower. In this case, if a buyer hits the \$200,000 while still remaining below the 80% maximum LTC, they are required to make up the rest of the cost and invest more of their own money.

## What is Loan-To-Value (LTV) Ratio?

The Loan-To-Value (LTV) Ratio is the loan amount given to the borrower on the back of the valuation of the asset. A higher LTV ratio represents a higher risk to the lender.

## The Difference between Loan-to-Cost and Loan-to-Value Ratio

The Loan-to-Value (LTV) ratio is related to the LTC ratio, but the LTV ratio uses the total value of the project rather than the cost.

The LTV ratio is calculated using the following formula:

For example, if the Appraised Property Value is \$400,000, and the total loan given is \$320,000, the LTV would be calculated as \$320,000 / \$400,000 = 80%.

## When to Use LTC or LTV?

LTC measures the debt against the overall cost of the project, whereas the LTV expresses the debt against the fair market value of the property. In both instances, with all other factors being equal, a higher value is an indication of greater risk since the borrower holds less equity in the investment proportionally.

Overall, LTC is more appropriate when assessing a project which requires more construction, such as a value-add (house flipping) property or a ground-up development that both come with more required construction costs. Meanwhile, LTV is more suitable for evaluating a stabilised real estate asset or a property which uses a core investing strategy.

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