Loan to value, which is often shortened to and displayed as LTV by mortgage lenders, is simply the percentage of the cost of the property you are borrowing. So, for example;
You want to buy a house that’s £200,000
You have a deposit of £20,000 - which is equal to 10% of the total cost of the property
This means 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 are borrowing 90% LTV
The loan to value ratio of your borrowing is important for two reasons:
To offer enough deposit to qualify for a mortgage - Every lender has a maximum LTV that they are willing to lend in any given situation, so it effectively dictates the amount of deposit you will need to provide in order to borrow enough to buy your chosen property
To obtain the best interest rates - LTV is used by providers offering mortgages, to assess the risk involved with lending. They favour lending at lower loan to value ratios, as the smaller the percentage of your home’s value they lend, the less likely a fall in property prices would affect them if they ever had to repossess. This means that they reward those customers borrowing a lower LTV with more competitive interest rates
Knowing how to work out LTV can help you to figure out the deposit size you will need to come up with to get a mortgage for a property in the value range that you’re looking at.
It’s actually a very simple sum, so no need for a loan to value calculator - but you will need to know how much deposit you have available
If you’re buying a property worth £250,000 with a deposit of £50,000
Size of mortgage - £200,000
Divided by property value = 0.8
X 100 to obtain percentage - 80%LTV
As mentioned above, lenders use the LTV ratio of your borrowing to determine how much risk there is in lending to you. Some mortgage products have a set maximum loan to value and others will be a bit more flexible, and base the LTV on the circumstances of the individual borrower.
The maximum LTV a lender will stretch to will therefore dictate the amount of deposit, or equity you need in order to borrow the remaining amount from them.
There are a number of things that can affect the maximum LTV a lender is willing to offer you, and these tend to be circumstances that make you a higher risk borrower, for example:
Being an older borrower, or nearing retirement age
Having poor credit
Being newly self-employed
Buying a property that they consider to be non-standard construction, or that has any other attribute that they feel may make it more difficult to sell
In these circumstances, lenders may limit the LTV of your borrowing, meaning you will likely need a larger deposit to get a mortgage.
Of course, each lender assesses risk slightly differently, so it’s possible to be offered different maximum loan to value ratios by different lenders. Be sure to speak to a mortgage broker, as they will be able to help you achieve the maximum LTV for your circumstances.
So, we know that lenders offer better interest rates to those customers borrowing a lower percentage of the value of their property, or in other words, at a lower LTV ratio, but what do lenders consider to be a good LTV ratio?
Well, typically, thresholds are between 60% LTV and 95% LTV, however, there is not really a minimum LTV level, and the lower the amount you borrow, the better.
Usually interest rates will change in 5% intervals, so those customers borrowing 90% LTV will be charged higher interest rates than if they could increase their deposit size to 15% and only borrow 85% LTV, they are likely to benefit from slightly improved interest rates.
Lenders have slightly different ideas of what they consider to be a good interest rate, however, 80% LTV tends to be the average middle ground, with borrowing above 80% considered to be high LTV borrowing and below that level considered to be a low (or good) LTV.
The best interest rates are typically reserved for those borrowers borrowing at 60% LTV or below, meaning you will need a 40% deposit in order to access the lowest mortgage interest charges.
Sadly, this means that most first time buyers will struggle to benefit from the most competitive interest rates on the market, whereas those remortgaging will often be able to take advantage of low LTV borrowing by utilising their equity.
Interest rates fluctuate regularly, sometimes multiple times per day, so it’s important to compare mortgage rates across the market for the LTV of your borrowing in order to access the most competitive rates within that threshold. Our mortgage rates today article provides an up to date average interest rate for each mortgage type.
No matter what type of buyer you are, there are a few ways that you can lower your LTV ratio in order to access better interest rates:
Saving a larger deposit
Renegotiating a lower asking price for the property
Improving your credit rating
Buying a home jointly or using a with family assistance
Increasing the value of your home - perhaps investing in an upgraded kitchen or adding an extension. Sometimes you will be able to take advantage of this due to natural property prices increasing across the market
Using a repayment mortgage as opposed to an interest only mortgage, as this will automatically reduce the LTV of your borrowing as you repay the loan (unless house prices fall)
Using an offset mortgage or making overpayments to reduce your mortgage balance more quickly
Offering a cash deposit or high value asset (if accepted by the lender) in addition to the equity, to secure your borrowing
When you remortgage the LTV is just as important as when you take out your first mortgage, and it will affect your borrowing in the same way. However, those remortgaging will 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 will include any deposit you put down and repayments you have 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 (owe more than the current value of their home) won’t usually be able to remortgage until they have gained some equity.
Loan to value simply means the percentage of the property purchase price that you need to borrow.
So if you want to buy a house for £100,000 and have £10,000 (or 10%) deposit, you would need to borrow £90,000, 90% of the cost of that home (or 90% LTV).
Yes the loan to value of your borrowing is one of the most important factors when it comes to how much interest you will pay, as lenders use this to determine which rates can be offered to which borrowers.
Those borrowing a higher percentage of the cost of the property that they are borrowing will have a higher LTV, which means that they are seen as higher risk borrowers, and will therefore be offered higher interest rates.
Those borrowing at a lower LTV will be able to access more competitive interest rates, with the best rates on the market usually available to those borrowing at 60%LTV or lower - in other words, those providing 40% or more deposits.
The maximum LTV currently available in the UK is 95%, however, it is sometimes possible for first time buyers to borrow 100% of the cost of their home with a guarantor or family assist mortgage.