What is the primary risk associated with a higher loan-to-value (LTV) ratio?

The primary risk associated with a higher loan-to-value (LTV) ratio is greater risk of default and negative equity. A higher LTV ratio indicates that a borrower is financing a larger portion of the property's value through debt. This situation inherently increases the risk that the borrower may default, particularly if they encounter financial difficulties or if the market value of the property declines.

When a borrower has a high LTV ratio, they have less equity in the property, which means that if the property were to lose value, the borrower could find themselves in a situation of negative equity—owing more on the mortgage than the property is worth. In such cases, the chances of defaulting on the mortgage increase, as the financial disincentive to continue making payments grows if they feel they cannot recover their investment by selling the home. Consequently, lenders are also more cautious with higher LTV loans, often requiring private mortgage insurance (PMI) to protect against potential losses.

While increasing property taxes, higher insurance premiums, and increased administrative costs can be associated with mortgage loans, they are not directly linked to the inherent risks posed by a higher LTV ratio. The direct impact of LTV on borrower risk and lender concerns is primarily about default and negative equity,