When you buy a home, your loan-to-value or LTV ratio is the proportion of the property’s value you are borrowing as a mortgage.
For example, if you buy a £200,000 property with a £10,000 (5%) deposit and £190,000 mortgage, your LTV will be 95%.
Your LTV is very important as it will impact the interest rate you pay on your mortgage.
How do I calculate LTV?
Working out your LTV ratio is pretty straightforward. Simply divide the mortgage amount by the value of the property and multiply the figure by 100 to get a percentage.
Going back to the above example: (190,000 / 200,000) x 100 = 95%
If you are buying your first home, a key element will be the size of your deposit. Once you know this, you can calculate your LTV ratio. Work out how much your deposit is as a percentage of the property’s value, then subtract this figure from 100.
For example, if you save a £20,000 deposit to buy a £100,000 property, £20,000 is 20% of £100,000, so your LTV would be 80%.
LTV and interest rates
Your LTV is important and the lower the better. This is because mortgage lenders offer their cheapest mortgages to borrowers with a low LTV.
Each mortgage product comes with a ‘maximum LTV’ which sets out the mortgage loan-to-value requirements. This figure is normally between 60% and 95%.
Maximum LTVs are normally in bands up to the following percentages:
In the past it was possible to get a 100% mortgage – these deals are now very rare. When house prices were rising quickly, before the credit crunch in 2008, some lenders even offered mortgages at 125% LTV. These mortgages are no longer sold and unlikely to ever make a return.
What is a good LTV?
Whether you’re buying a home or remortgaging, the lower your LTV the better.
Realistically, as a first-time buyer you should aim to have a LTV of 90% or less. A higher LTV than this will severely limit your choice of mortgage products.
If you’re remortgaging, the best mortgage products are available to people with a LTV of 60% or less. Below this, it doesn’t make much difference.
How to improve your LTV
If you’re buying a home, you can reduce your LTV by saving up a bigger deposit. You’ll need at least a 5% deposit to get a mortgage at all. If you can save up 10% it will give you more choice of mortgage deals. If you can save 20% or more, even better. Essentially, the bigger your deposit in relation to the property’s value, the lower your interest rate will be.
If you’re remortgaging, you will hopefully find that rising house prices have helped lower your LTV. For example, say you bought a home worth £200,000 with a £180,000 mortgage. Your LTV would be 90%. This means you would only be eligible for a mortgage with a maximum LTV of 90% or higher. Rates are likely to be high on these deals.
If, in two years’ time, when the time came to remortgage, rising house prices meant your home was worth £230,000, your LTV would be 78%. So, you’d be eligible for mortgages with a maximum LTV of 80%. Rates on these deals are likely to be more competitive.
Another way to lower your LTV is to reduce the amount you owe on your mortgage. With a repayment mortgage you’ll be chipping away at the debt each month via your payments, so you’ll owe less as time goes on. But you can pay your debt quicker, and therefore reduce your LTV, by making overpayments.
Why do mortgage lenders care about LTVs?
The more you borrow as a mortgage compared to your property’s value, the higher the risk is for the mortgage lender.
If you don’t pay your mortgage as agreed, the lender can ultimately repossess your home and sell it to cover the debt. However, if property prices fall, there is a risk that the sale of the property won’t cover the outstanding balance.
The lower the amount you owe in relation to the property’s value, the easier it will be for the lender to recoup its money.
Need a mortgage quote?
Want to find out your options when it comes to mortgages? We can connect you with our experienced panel of advisers who can provide you with a mortgage quote. It’s free and takes a matter of minutes. Let’s get started.