DEFINITION of '125% Loan'

A loan, usually a mortgage, with an initial loan amount equal to 125% of the initial property value. In other words, a 125% loan has a loan-to-value ratio (LTV ratio) of 125%.

BREAKING DOWN '125% Loan'

A primary measure of a loan's risk to a lender is the size of a loan relative to the value (LTV ratio) of the underlying property. A 125% loan is a relatively risky loan as compared to a loan with a LTV ratio of less than 100%, and therefore, according to the risk-based pricing method used by lenders, a loan with a LTV ratio of 125% will carry a higher interest rate than a loan with a LTV ratio of 100% or below.

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