Loan to Value or LTV is an expression used by all mortgage and secured loan lenders. It is a pretty simple concept but not everyone is aware of what it is and how to work it out.
This quick Loan to Value Guide should provide some answers.
What is a Loan to Value (LTV)?
When looking at your mortgage options you will see that lenders and mortgage brokers mention LTV quite a lot. For a lender the loan to value is one of the most important aspects of your mortgage application as it represents part of their risk.
The higher the LTV figure is, the higher the amount of money the lender is giving you and so the higher the risk for them if you are unable to pay it back.
A loan to value or LTV is the percentage that your mortgage represents when compared to the purchase price or value of your home.
An LTV is expressed as a percentage:
- 95 percent
- 95% LTV
|Loan to Value (LTV)||95%|
You will always encounter the LTV ratio when looking for a mortgage but it does also apply to all forms of secured loan borrowing such as:
How do you work out an LTV ratio?
The LTV ratio is a sum that shows the percentage of your mortgage against the value or purchase price of your home. It is one figure divided into the other.
LTV = (mortgage ÷ house value) x 100
So as a quick example:
You buy a house for £200,000
You have a deposit of £20,000
You need a mortgage of £180,000
LTV = (180,000 ÷ 200,000) x 100
LTV = 90%
Therefore the deposit represents 10% of the house value.
You can find out what LTV you need by inputting the mortgage amount needed and property value or purchase price in the calculator.
This calculator is for illustrative purposes only.
Why is Loan to Value so important?
The LTV ratio is vital to lenders when they are assessing a new mortgage application. This is because mortgages with a higher LTV percentage represent a bigger risk for the lender.
A mortgage is legally secured against a property so the lenders rely on this right to sell your property to get their money back via repossession.
With a 90% mortgage the lender has a 90% stake in the property whereas you only have 10%. Should property prices drop then the lender is unlikely to make back all of the debt should you be unable to keep up with the repayments.
Conversely, as a lower LTV ratio represents a reduced risk to the lender, they will often advertise better terms for these borrowers who have bigger deposits.
If you have poor credit then lenders will normally only offer lower loan to value mortgages to reduce their risk.
What is a good LTV?
As low as possible would be best. The lower the LTV, the greater number of mortgages you have to choose from.
At 50% LTV or below you will have the pick of most lenders and their best rates, providing that you also meet their income requirements etc.
75% is a common break point for lenders of all types.
First time buyers generally have the highest loan to value ratio from all borrowers and typically look towards 90-95% mortgage deals.
Don’t forget that the bigger your deposit is, the more deals you have to choose from with lower interest rates. This will lower your monthly mortgage payments.
How can I improve my loan to value?
The lower your LTV ratio is, the higher your own equity in the property is. By having higher equity you can ease problems caused by house prices falling. If the value of your home falls below the value of your mortgage you have negative equity.
If you are moving home and buying a property then you can improve your LTV ratio by increasing your deposit or by negotiating a lower purchase price and maintaining your level of deposit.
If you already own a property then certain home improvements will cause the value to increase. If you have a repayment mortgage then your equity gradually increases each year as your loan balance falls. You could speed this up by making overpayments to your mortgage lender.
Also, the general rise in house prices will create equity for you and a lower LTV %.
Ask your mortgage broker how a lower LTV would benefit you. If you can move from 80% to 75% loan to value then you should comfortably have better mortgage options and cheaper rates.
But moving from 75% to 70% is unlikely to give you any dramatically better options.
How does LTV affect your mortgage?
The loan to value (LTV) you need will affect the lenders and products you have to choose from.
Some lenders only work on lower LTV lending, so anything above a certain % they will turn down.
If your LTV is 75% or lower then you’re likely to qualify for a wide range of mortgage deals.
Some lenders offer higher income multiples for a certain size of deposit. So it is a good idea to speak with your independent mortgage adviser about how much you would like to put down as a deposit and how much you need for a really good deal.
What does Loan to Gross Development Value (LTGDV) mean?
The Loan to Gross Development Value or LTGDV is the ratio between the amount of money lent against a property development project and the estimated open market value after all development works have been completed.
LTGDV stands for Loan To Gross Development Value.
How does LTV work with a remortgage?
The basic Loan to Value ratio calculation is the same.
LTV = (mortgage ÷ house value) x 100
You will use the current amount outstanding on your mortgage and an estimate of the current value of your home. With a repayment mortgage, your debt is slowly decreasing each year as you make the monthly repayments. You could contact your lender and ask for the current balance to get a more accurate figure.
With remortgages the LTV works with equity rather than deposit. The equity percentage should grow as your mortgage reduces and the property prices rise.
So you don’t need a deposit to remortgage.
If you have lived in your home for a while the LTV will most likely have dropped quite a lot.
Again, it’s a good idea to ask your mortgage advisor about any LTV bands that could offer a better deal. It might be possible for you to make a small extra repayment, to lower your mortgage, and then this allows you to qualify for a great remortgage deal as the LTV has gone down.
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