CLTV—or combined loan-to-value ratio—is the ratio of all loans secured by a property to the value of the property. The metric is used by lenders to determine the riskiness of a loan, as well as the likelihood that the loan will be repaid. A higher CLTV ratio indicates more risk to the lender, and a lower CLTV ratio indicates less risk.
What Is CLTV?
CLTV allows lenders to analyze a loan based on all of the borrower’s liabilities and debt obligations against a specific property—not just the first, or primary, mortgage. This protects both the lender and borrower from accepting risk that can’t be managed.
To calculate a borrower’s CLTV, divide the total outstanding balance of loans secured by a property by the appraised value of the property. The result is expressed as a percentage. A higher CLTV ratio means the borrower has less equity in the property and is therefore more likely to default on the loan.
How to Calculate CLTV: CLTV Formula
CLTV is calculated by dividing the total amount of all loans held by a borrower on a property by the total appraised value of the property securing those loans. To calculate the ratio, follow this CLTV formula:
CLTV = (Value of Loan 1 + Value of Loan 2 + Value of Loan 3) / Value of Property
CLTV Meaning & Why It Matters
Lenders use CLTV ratios to assess risk when considering a loan application. A high CLTV ratio means that the borrower has very little equity in the property and is more likely to default on the loan. A low CLTV ratio means that the borrower has more equity in the property and is less likely to default on the loan.
In general, lenders require borrowers to have a maximum CLTV of 80%, but the most creditworthy borrowers may be able to exceed this percentage. If a commercial real estate investor uses mezzanine financing in addition to a conventional term loan to finance a property, they may be able to achieve a CLTV of between 85% and 90%
If the borrower were to default on the loan with a higher CLTV, the lender would have a harder time recouping their losses. For this reason, lenders often charge a higher interest rate for loans with a high CLTV ratio. This protects both the lender and borrower from accepting risk that can’t be managed. Understanding CLTV also tells a lender how much a borrower’s property can decline in value before they owe more on the property than it is worth.
The ratio answers vital questions for lenders such as:
- What is the minimum down payment?
- How much risk does this deal hold?
- How much skin will the borrower have in the deal?
- How much skin will the lender have in the deal?
- Can the borrower afford this loan?
Consider, for example, a real estate investor who wants to borrow against a shopping center that has a current appraised value of $1,000,000. The investor currently owes $200,000 on the primary mortgage and $50,000 on a business loan secured by the building, and wants to borrow $150,000 from the lender.
The CLTV is calculated as follows:
CLTV = Total Debt / Total Appraised Values
CLTV = $200,000 + $50,000 + $150,000 / $1,000,000
CLTV = $400,000 / $1,000,000
CLTV = 0.40
Based on these numbers, the borrower’s CLTV is 40%, meaning the loan does not pose excessive risk to the lender. In this case, a lender is likely to approve the borrower—assuming they are otherwise qualified for the loan.
LTV vs. CLTV
In commercial real estate, loan-to-value (LTV) is a ratio that expresses the amount of a single loan as a percentage of the value of the property being financed. Like CLTV, LTV is used by lenders to determine risk when extending a loan, and is also a factor in mortgage pricing. A higher LTV ratio suggests more risk to the lender.
However, the LTV ratio only takes into account the mortgage loan and not any other outstanding debt obligations the borrower may have against the property. This makes CLTV a more comprehensive metric for assessing risk. Because of this, loans with a higher CLTV ratio will often come with a higher interest rate.
For example, say John Smith wants to buy a duplex for $400,000. He has $40,000 for a down payment and plans to finance the remaining $360,000 with a mortgage. His LTV ratio would be 90%. However, if John also takes out a home equity loan for $80,000, his CLTV ratio would be 110% ($440,000 in loans/$400,000 in value).