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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: lending against asset values: UK third-party practices - loan to value ratios in property lending

The loan to value (LTV) ratio is the proportion of the value of a property that a lender is prepared to lend. It is usually expressed as a percentage.

The value of a property can vary depending on how it is calculated. For example, property can be valued let or unlet. In the commercial market a let property will generally have a greater value because it has an income stream. This may also affect how fast a property is likely to sell.

If a valuation is to be relied upon, it should be a formal, independently produced document, and it should be critically examined, for example:

  • Who are the valuers? What are their qualifications?
  • Who instructed the valuer? Who was the valuation addressed to? If not addressed to the lender, can the lender rely upon it?
  • Are the instructions enclosed with the valuation document, is the valuation report signed and dated?
  • Valuations have a limited shelf life. They are usually valid for three months, after which the valuation lapses and a new one has to be carried out. This is because the Professional Indemnity Insurer will only cover the valuer for a period of time. In a highly volatile market a valuation may only be valid for a month. In a group situation, valuations are unlikely to be regularly performed.

“Yield” is a term which is often used. In this context it means the rent the property is currently generating expressed as a percentage of its value.

Yields vary depending on economic circumstances as well as the security of the property and its income stream. The lower the yield in a stable market generally means the higher the value of the property. Yield can also be influenced by the credit status of a tenant, the terms of a lease and any insurance against default.

Experience indicates the maximum LTV is around 90%, and then only in the most favourable circumstances, such as prime property used as security and where the borrower is able to comfortably service the debt. The more normal LTV range is much lower than this. The De Montfort Report (INTM518030) may be consulted, as may the LBS property sector team in Leeds, and Specialist PT International in Bootle.

These value ranges assume no existing security interest over the property. If the borrower has debt other than that provided by the senior lender (typically the holder of a first charge over a property), such as intra-group loans, the senior lender may reduce the LTV to ensure that there is sufficient security for the debt.

Third party lenders are more prepared to make a loan if land or buildings are available as security. They will still, however, look closely at the borrower’s capacity to service debt, and are likely to want covenants in the loan agreement to monitor cash flow in order to ensure this capability continues.