Two investors hold £500,000 portfolios. One can borrow £375,000; the other can borrow £150,000. Neither has a better relationship with the lender and neither is being treated unfairly. The difference is entirely in what they hold.
Borrowing capacity is not a function of portfolio value. It is a function of portfolio value filtered through collateral quality, and understanding that filter is the difference between a facility that behaves predictably and one that surprises you.
What LTV actually measures
Loan-to-value is the proportion of an asset’s market value a lender will advance against it. A 70% LTV on a £100,000 holding supports £70,000 of borrowing.
The remaining 30% is not arbitrary. It is the lender’s estimate of how far the asset could fall, and how much slippage would be incurred, in the time it would take to liquidate the position in a stressed market. That framing explains every LTV decision that follows.
What drives the band
Liquidity dominates. A FTSE 100 constituent trading tens of millions of pounds a day can be exited in minutes at close to the screen price. A small-cap trading £200,000 a day cannot. The lender’s exposure is not the price today but the price achievable on exit.
Volatility compounds it. A stock with 60% annualised volatility can plausibly move 15% in a week. The haircut must absorb that move before the loan is impaired.
Diversification changes the arithmetic entirely. Twenty uncorrelated positions do not move together; one position moves alone. This is why the same security can carry a different effective LTV depending on how much of the portfolio it represents.
Corporate events introduce discontinuity. Stocks in takeover situations, pending restructurings or suspension risk are routinely excluded or heavily haircut, because gap risk cannot be hedged by reacting quickly.
Typical bands
| Asset class | Indicative LTV |
|---|---|
| Government bonds (developed market) | 85% |
| Broad-market ETFs | 75% |
| Large-cap index constituents | 70% |
| Sector and thematic ETFs | 60% |
| Other listed equities | 50% |
| Small-cap, illiquid or event-driven | 0–30% |
These are indicative. Every lender maintains its own eligibility list, and positions can move between bands as liquidity and volatility change.
Concentration: the rule that surprises people
Most facilities apply a concentration overlay. A common structure caps any single holding at a proportion of the portfolio — say 20% — for full LTV purposes, with the excess receiving a reduced rate or none at all.
Return to the two investors. The first holds twenty £25,000 positions in index constituents: no position exceeds 5%, full 70% LTV applies throughout, capacity is £350,000. The second holds £400,000 in one mid-cap and £100,000 spread across four others. On the concentrated holding, only the first £100,000 attracts full LTV and the remaining £300,000 is haircut severely. Same portfolio value, less than half the capacity.
Neither investor was told anything different. They simply built different portfolios.
Capacity moves with the market
The single most important property of LTV-based lending: your capacity is recalculated continuously, but your loan balance is not.
A £500,000 portfolio at 70% LTV supports £350,000. Draw £250,000 and you hold £100,000 of headroom. Now the market falls 20%:
- Portfolio: £400,000
- Capacity: £280,000
- Balance: still £250,000
- Headroom: £30,000
A 20% market decline consumed 70% of your buffer. Another 10% decline puts you in deficit and triggers a call. This asymmetry — capacity falls, debt does not — is the mechanism behind almost every margin call that surprises the borrower.
Building a facility that behaves
Four practical principles:
Borrow well inside your capacity. Treat 50% of maximum as a working limit rather than a target. The gap between “available” and “sensible” is where you survive a drawdown.
Diversify for capacity, not only for returns. A more diversified book supports more borrowing at better LTVs. Diversification pays twice.
Know which of your holdings are fragile. Ask your lender for the LTV applied to each position, not just the aggregate. The number you need is the one attached to the holding most likely to be re-banded in stress.
Model the decline you have not had yet. Compute your position after a 20%, 30% and 40% fall before you draw, not after. The arithmetic takes minutes; the alternative is discovering it on a Monday morning.
This article is general information and not investment advice. LTV levels shown are illustrative and subject to review.