What is loan to value or LTV for a mortgage?

Loan to value ratio (LTV)

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

Why is loan to value important?

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

How to work out loan to value (LTV)

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

For example:

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

How is LTV used by lenders?

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.

What is a good LTV ratio?

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.

Loan to value and equity

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.