What does a loan-to-value ratio (LTV) indicate in mortgage lending?

The loan-to-value ratio (LTV) is an important metric in mortgage lending that indicates the relationship between the mortgage amount and the property's market value. Specifically, it is calculated by dividing the amount of the loan by the appraised value or purchase price of the property, expressed as a percentage.

A higher LTV ratio might indicate higher risk for lenders, as it suggests that the borrower is financing a larger portion of the property's value and has less equity invested in it. This can affect loan terms, interest rates, and the necessity of mortgage insurance. Conversely, a lower LTV ratio often implies a safer investment for lenders, potentially resulting in better financing conditions for the borrower.

Other options, while they relate to aspects of mortgage lending, do not define the LTV ratio. For instance, the interest rate is separate from LTV and pertains to the cost of borrowing. The maximum loan amount involves various factors including borrower income and lender policies but does not directly relate to the LTV concept. Lastly, a borrower's creditworthiness reflects their ability to repay the loan but is not measured by the LTV ratio. Thus, the correct answer succinctly captures the essence of what LTV represents in the context of mortgage lending.