Loan to Value: The Single Best Criterion for Private Lending in Costa Rica

If a lender were allowed one number and nothing else before deciding, this would be it. Loan to value is the loan amount expressed as a percentage of what the property is worth — and everything protective about property-backed lending lives inside that ratio.

What the ratio is really measuring

Read it backwards and it becomes obvious. A loan at 50% of value means the property could lose half its worth before the debt is exposed. At 70%, the margin is thinner. At 85%, a modest correction and the costs of enforcement can swallow the difference.

It is not a measure of the borrower. It is a measure of how much room you have to be wrong — about the appraisal, about the market, about how long a sale takes. That is why it outranks every other figure on the file, including the rate.

The denominator is where it breaks

The ratio is only as honest as the value underneath it, and there are three different numbers in circulation for any Costa Rican property.

The municipal declared value is the figure the property is registered at for local tax. It is frequently years out of date and often far below market. It is useless for lending and tells you something else entirely.

The asking price is what the owner hopes for. It is not evidence.

The appraised value, prepared by a professional against comparable sales, is the one the ratio should be built on. Where a file uses anything else as its denominator, the percentage on the page is decoration.

The Costa Rican adjustment

A ratio that feels conservative in Toronto or Madrid can be less conservative here, for one structural reason: most property in this country changes hands for cash, because bank credit requires permanent residency and that takes four years at minimum. A smaller financed buyer pool means a longer time to sell.

So the question is not only whether the property is worth the appraisal. It is what it would fetch on a compressed timeline. Value and liquidity are separate things, and a ratio that ignores the second is optimistic.

What moves the acceptable ratio

A finished home in an established area with recent comparable sales supports a higher ratio than raw land with no services, a part-built structure, or an unusual property with nothing to compare it against. Location, condition and how ordinary the asset is all feed into the same judgment.

The ratio also interacts with the rate. A file with a wide cushion tends to sit at the low end of the 9% to 16% range, and a tight one at the top. When a high rate appears alongside a high ratio, those two facts are not a coincidence — they are the same fact stated twice.

The other half: position

A conservative ratio behind somebody else’s registered lien is not a conservative position. Order of registration decides who is paid first, and a second-position lien at 50% of value can be worth less than a first at 70%. Check both together or neither means anything.

Using it in practice

Decide the maximum ratio you will accept before you look at any file, and hold it. The pressure to stretch always arrives dressed as an attractive rate on an otherwise appealing property, and it is the single most common way a careful lender ends up with a careless loan.

What the ratio looks like in practice

Take a property appraised at $400,000. A loan of $200,000 is at 50%: the property could lose half its value and the debt is still covered. At $260,000 the ratio is 65% and there is a 35% margin — comfortable, and where a lot of good files sit. At $320,000 it is 80%, and a soft market plus the cost and delay of enforcement can consume the difference entirely.

The numbers themselves are unremarkable. What matters is that the margin is the thing being bought, and that it is bought with the loan amount rather than with the interest rate.

The ratio moves during the loan

It is not fixed once and finished. On an interest-only loan the principal does not reduce, so the ratio only improves if the property appreciates — and it worsens if the market softens or if arrears and enforcement costs accumulate on top of the balance.

Over six months that drift is negligible. Over three years it is not, which is a reason terms at the longer end deserve a wider starting cushion than a short bridge does. The ratio you accept at the start is the best it is likely to be.

The cushion is what makes a problem survivable rather than fatal: it does not stop a borrower defaulting, but it means the default has a way out. Every file we prepare states the loan amount, the appraised value and the registered position, so the ratio is on the page rather than left for you to reconstruct.

Article by Glenn Tellier (Founder of CRIE and Grupo Gap)