What does a higher loan-to-value ratio typically indicate?

A higher loan-to-value (LTV) ratio typically indicates higher risk for the lender. This ratio is calculated by dividing the amount of the loan by the appraised value of the property being financed. When the LTV ratio is high, it suggests that a larger portion of the property's value is being financed through debt.

From the lender's perspective, a higher LTV implies that there is less equity invested by the borrower, which can be a red flag. If the borrower defaults, the lender may face significant losses, especially if property values decline. Essentially, a high LTV ratio means that the collateral (the property) does not sufficiently cover the loan amount in the event of default, thereby increasing the lender's risk exposure.

In contrast, a lower LTV ratio would indicate that the borrower has more equity in the property, which is considered less risky for the lender. The concept of risk in lending revolves around the likelihood of borrower default and the ability to recover losses, making the higher LTV a crucial indicator of increased risk.