Loan to value, or LTV, is one of the most widely used phrases in the mortgage industry and media, grabbing the headlines whenever new housing figures are announced. Calculating LTV is crucial in finding and comparing the best mortgage rates and deals.
But what exactly is a loan to value ratio? What’s the difference between a 90 LTV and a 95 LTV? We take a closer to explain one of the most important bits of financial jargon in the UK.
Loan to value ratio - A loan to value ratio is the ratio between your property value and the mortgage your require (the loan)
High vs. low loan to value - The higher the loan to value ratio the higher the risk
What loan to value ratios are there? - LTV ratios vary widely depending on the size of your deposit and the property value
Help to buy - The Government's Help to Buy scheme can help you if you have a smaller deposit
Calculating loan to value - It's easy to calculate your LTV, just divide the mortgage by the property value
Saving for a property - The most important thing to do when trying to buy a property is to save
It is many people’s dream to be able to one day own a property, to no longer live under someone else’s roof. But the prospect of owning your own property comes with the spectre of taking out a mortgage.
Properties, in the UK at least, are almost always worth more than we can afford in cash, so to buy our own home the majority of us will have to take out a loan. However, a mortgage isn’t just any loan, it’s the largest loan most of us will ever take out.
With the average house price in the UK now around £250,000 most people will need to borrow in the hundreds of thousands to get enough money together to afford a mortgage, and that’s where loan to value comes in.
If for instance you have a deposit of £50,000 in your bank account, you will need another £200,000 to be able to afford your £250,000 property. If your bank offers you a loan your loan to value is simply the amount you borrowed set against the value of the property.
So, £200,000 on a £250,000 property works out at a 80% loan to value ratio, with your deposit covering the remaining 20%.
Loan to value ratios of 80% and lower are typically seen as low LTV ratios, whereas those over 90% would be considered high loan to value ratios.
As you would expect, the higher the ratio of the loan the riskier it is for the lender offering the mortgage, and hence the higher the interest rates are likelier to be (although many other factors, not least your credit score, will impact this).
Conversely low LTV ratios represent a lower-risk for both borrowers and lenders, with lower interest repayments. Lower LTV ratios are typically more suitable for those with higher deposits or higher-risk borrowers, including people with a history of bad credit, who wouldn’t otherwise be offered a mortgage.
Higher LTV ratios on the other hand are more commonly used for those with excellent credit scores who lenders deem low risk. Higher LTV ratios can be extremely dangerous however due to the high interest repayments and increased risk of defaulting on the loan.
Higher LTV ratios were widely implicated in the house price crashes of 2010 and 2011 when a large number of borrowers defaulted on loans that, as was subsequently revealed, were of a 100% LTV or higher.
As a result it was extremely difficult to find high LTV ratio mortgages in recent years, although this has since changed.
LTV thresholds are between 100% and 60%, once your deposit gets above 40% you can enjoy the cheapest rates.
These are lowest available LTV mortgages, and offer the cheapest rates. Raising the big deposits might be tough, but will likely deliver some big savings with the low rates and cheap monthly repayments.
These are in the mid range of LTVs, offering competitive rates giving manageable monthly repayments
These mortgages require the lowest deposits which gives them more expensive rates. However for first time buyers with smaller savings they can be the first step onto the property ladder.
The reaction of banks to a contracting housing market and large numbers of borrowers defaulting on their loans was to lend less, with lower LTV ratios becoming the norm after the crash.
This, however, also meant that it was incredibly difficult for those with low deposits, particularly first-time buyers, to get on the property ladder.
The government’s responses was to provide a financial incentive to lenders. The Help to Buy scheme guarantees lenders up to 15% of high 95 LTV mortgages so they can offer loans to borrowers with smaller deposits.
Consequently it is now increasingly possible for borrowers to find 90 LTV and 95 LTV mortgages, both through the Help to Buy scheme and without it.
Critics have argued that, while the Help to Buy scheme has made mortgages more competitive and helped many get on the property ladder, it is simply storing up risk for the future in the form of high borrowing levels.
You don’t need a loan to value calculator to work out your LTV. Simply divide the amount you are looking to borrow by the total value of the property you are looking to purchase and you will get your LTV.
However, whilst you may not need a loan to value calculator, you will need a calculator to tell you how much you can safely afford to borrow.
A mortgage calculator allows you to work out your estimated monthly repayments based on your repayment period and interest rate. It will also be able to show you how much your repayments will be if you choose to pay by interest only, and how much you will pay if interest rates go up.
To keep things simple we include an LTV calculator tool in our mortgage calculator, which also displays available mortgages and monthly repayments. Simply put in the value of the property you wish to buy and how much you need to borrow and it'll help you calculate LTV for you.
Take a look at our mortgages table to work out the loan-to-value ration you need.
The first rule of buying a property is to save, then save again. The greater your deposit the better the property you’ll be able to afford without stretching the limits of what you can afford.
With a significant deposit you can afford a lower LTV ratio, meaning you will get a better deal and pay less in interest payments over the term of your mortgage.
However, make sure you estimate what you can afford correctly. While the deposit is the most significant cash outlay when buying a home there are plenty of other costs to consider.
You will have to pay legal fees, assessment fees and, if your property value is above the limit, stamp duty. You will also have to put money aside for extra unforeseen expenses that you could incur as a result of damage to the property.
If the boiler breaks within the first week of moving in for instance and needs to be replaced you will need some significant savings left over to avoid being driven into debt.