What is loan to value or LTV for a mortgage?

What does loan to value mean?

Loan to value, which is often shortened to LTV by mortgage lenders, is simply the percentage of the cost of the property you're borrowing.

LTV example

You want to buy a house that’s worth £200,000

You have a deposit of £20,000 - which is equal to 10% of the total cost of the property

The remaining cost (or the other 90%) will need to be borrowed from a mortgage lender

When you borrow 90% of the cost of the property, you're borrowing at 90% LTV

Why is loan to value important?

The loan to value ratio of your borrowing is important for two main reasons:

• Your LTV determines how much deposit you need to offer to qualify for a mortgage - Every lender has a maximum LTV that they're willing to lend, so it effectively dictates the amount of deposit you'll need to provide in order to borrow enough to buy your chosen property.

• Your LTV impacts the interest rates available to you - LTV is used by mortgage providers to assess the risk involved with lending. A lower LTV is less risky for the lender because it provides them with more of a financial buffer if house prices fall and they need to repossess. Lenders, therefore, reward customers with a lower LTV by offering more competitive interest rates.

How to work out LTV

To calculate your LTV ratio, divide your mortgage amount by the property's value, then multiply by 100.

If you're trying to work out your loan to value ratio based on your deposit, simply subtract your deposit from the property price to get your estimated loan amount, then continue with the calculation above.

Here's how to calculate LTV for your mortgage

Let's say you're buying a property worth £250,000 with a deposit of £50,000

Size of mortgage: £250,000 - £50,000 = £200,000

Divided by property value: £200,000 divided by £250,000 = 0.8

Multiply by 100 to obtain percentage: 0.8 x 100 = 80% LTV

Knowing how to work out your loan to value ratio can help you to figure out the deposit size you will need to access a mortgage for a property in the value range you’re looking at. 

LTV thresholds explained

Loan to value brackets, also known as bands, tend to range between 60% LTV and 95% LTV, going up in 5% increments, though not all lenders offer mortgages at all LTV bands.

LTV brackets are defined in 5% intervals, so increasing your deposit to move into the next LTV band can impact your rate.

For example, customers borrowing 90% LTV would typically be offered higher interest rates than if they borrowed at 85% LTV. However, reducing your borrowing from 90% to 88% LTV is unlikely to impact the rate offered.

There's not really a minimum LTV level, though the most competitive rates on the market are usually offered to those borrowing at 60% LTV or below.

How does LTV affect mortgage rates?

Loan-to-Value (LTV) is a key factor in determining your mortgage interest rate.

• Lower LTV, usually lower rates. Those borrowing a lower LTV (achieved with a larger deposit) may be able to access more competitive rates as you'll be seen as lower risk.

• Higher LTV, usually higher rates. A higher LTV means you're borrowing more and have a smaller deposit, which lenders consider higher risk. You'll therefore likely be offered higher interest rates.

The best rates on the market are usually available to those borrowing at 60% LTV or lower - in other words, those providing a deposit of 40% or more.

Sadly, this means that many first time buyers will struggle to qualify for the most competitive interest rates on the market. Those remortgaging, however, can often take advantage of low LTV borrowing by utilising their equity.

Your loan to value is important when you remortgage, too

When you remortgage, your LTV is just as important as on a first time buyer mortgage, and affects your borrowing in the same way. However, those remortgaging typically use the equity built up in their home instead of a deposit.

Equity is the percentage of your home that you own (at its current value), so this includes any deposit you initially put down and the total of repayments you've already made.

As your house price is likely to have changed since you bought it, it’s important to use its current value when calculating your LTV. The greater equity you have, the lower the LTV of your borrowing and therefore the better the interest rates available to you when you remortgage.

Those in negative equity (who owe more than the current value of their home) won’t usually be able to remortgage until they have gained some equity.

If you're ready to remortgage, you may find it helpful to speak to a broker like Mojo Mortgages. They'll be able to compare mortgage deals and provide personalised recommendations.