A type of ratio cap, and part of borrower-based measures (instruments or tools) that sets a cap on a bank’s loan-to-value (LTV) ratio. It is meant to limit or reduce the systemic risk that is associated with asset price cycles in an economy.

For example, an LTV ratio cap of 70 percent may be imposed on cash-out refinance mortgages– that is, refinancing at a higher amount than the loan balance to convert home equity into monetary amounts for personal use, and 75 percent for rate and term refinance mortgages (i.e., refinancing aiming to change the interest rate or term of the mortgage with no cash out).

LTV ratio caps may be lowered or tightened by regulators depending on market conditions and the extent to which borrowers seek to finance their assets (e.g., second and third home purchases).