Loan to value, or LTV, is one of the most widely used terms in the mortgage industry, but what does it mean and how does it impact your mortgage? We answer these common questions below, as well as showing you how to calculate the LTV of your borrowing, so that you can better understand and compare the best mortgage products available to you.
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. 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
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
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'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
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 problematic a fall in property prices would cause them if they had to repossess. They, therefore, 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 you’re looking at.
It’s actually a very simple sum- but you'll 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
Lenders use the LTV ratio of your borrowing to assess the risk in lending to you. Some mortgage products have a set maximum loan to value and for others, lenders base the LTV on the circumstances of the individual borrower.
There are a number of things that can affect the maximum LTV a lender is willing to offer you, and these tend to be those circumstances that would 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 can help you achieve the maximum LTV for your circumstances.
80% LTV borrowing or below tends to be considered a 'good LTV' - or in other words, a relatively low LTV, by most lenders, although there is some variance. A loan size above 80% is therefore considered a high LTV mortgage, and rates are typically higher at this level of borrowing.
LTV thresholds tend to range between 60% LTV and 95% LTV, however, there's not really a minimum LTV level, so the less you borrow, generally, the better the rate. However, it's also important to note that not all lenders offer mortgages at all LTV bands - at the current time there are fewer 95% LTV mortgages available due to the high cost of borrowing for lenders.
LTV brackets are defined in 5% intervals, so increasing your deposit to move into the next LTV bracket (or threshold) can impact your rate. For example, those 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.
The best interest rates are usually offered to those borrowing at 60% LTV or below, so you'll need a 40% deposit to access the lowest mortgage interest rates available.
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.
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 to access the most competitive rates within that threshold. We provide an up to date table of today's average mortgage rates on the mortgages home page.
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:
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)
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, your LTV is just as important as when you take out your first 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.
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'll 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 will have a higher LTV. This means they're seen as higher risk borrowers, and will 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 a deposit of 40% or more.
There are two ways to do this:
Save a larger deposit: this automatically reduces your LTV, and if you can reduce is into the next LTV bracket, you may benefit from a lower rate.
Compromise: Nobody wants to compromise when buying a home, but if you're unable to negotiate a lower price with the lender, you'll likely have to look for a lower priced property. This is not many buyers' first choice, but it can be less stressful than overstretching your budget.