Home credit: Why is it considered the lowest value between acquisition and evaluation for LTV?

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What is LTV in mortgage credit?

No home loan, in order to determine the Loan-to-value (LTV) factor, the lowest value between the property acquisition value and the appraisal value is considered. https://www.poupancanominuto.com/credito-habitacao?utm_source=poupanca-no-minuto&utm_medium=artigo&utm_campaign=383-credito-habitacao

But what is LTV? This factor represents the measure that compares the loan value with the appraisal value of the real estate project, that is, the ratio between the amount financed by the bank to purchase the property and the appraised value of the house).  

For LTV, consider the lowest value between acquisition and evaluation.

According to the Bank of Portugal (BdP), the determination of the property value is a critical variable for the calculation of the LTV and for the relevance of the ratio as a risk indicator.

Therefore, the ability of the LTV to indicate potential losses for the financial system resulting from credit default depends on whether the variable considered for the property value corresponds to the market value at a certain time or to the resale value of the property.

As a rule, there is usually some discrepancy between the property transaction value and its bank evaluation, which is due to a certain subjectivity in determining the property value by the appraiser, buyer, or seller.

In other words, considering the lower value between the two values for calculating the LTV is a prudent procedure in assessing the risk associated with the property, consistent with the recommendations of the European Systemic Risk Committee and the practices followed by several European countries.

In addition, there are situations in which it is not possible to determine the acquisition value of the property or when there is no suitable reference for its market value, such as in cases of properties acquired by donation or inheritance. In these cases, the LTV is always calculated based on the appraisal value.

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