What is loan-to-value ratio (LTV)?

Key takeaways

• Loan-to-value ratio shows how much you're borrowing relative to the property price

• Lower LTVs typically give you better mortgage rates but requires a higher deposit

• Mortgage rates usually come down in 'steps', for example, from 90% LTV to 85%, so consider if you can increase the size of your deposit to access better rates

What is a loan to value ratio?

Loan-to-value ratio (LTV) is a way of measuring how much money you’re borrowing, compared to the total value of your property. Your LTV will be expressed as a simple percentage. So if you’re buying a home worth £100,000 with a deposit of £10,000 and then borrowing the other £90,000, your loan to value ratio will be 90%.

If you’re buying the same property with a deposit of £5,000 and borrowing £95,000 your LTV will be 95%.

You’re most likely to encounter LTVs when you’re applying for a mortgage, and your LTV is a major factor in determining what kind of mortgage you can get.

In general, lenders reserve their best deals for people with lower LTVs as they are borrowing smaller amounts when compared to those with a high LTV.

There’s no minimum LTV, though a lower number is always better. But even if you can’t put together a big deposit, help is still available. There are also several 95% LTV mortgage deals available, which means that your deposit only needs to be 5% of the value of your new home.

Why is my loan-to-value ratio important?

Your loan-to-value ratio is a very important factor when it comes to buying property because:

• Loans with a higher LTV are a bigger risk for the lender. If you have a higher LTV and can’t make your repayments, they’ll make back less money by reselling your house.

• Lower loan-to-value ratios also protect lenders from changes in house prices. If you have a 95% LTV mortgage and house prices fall by 5%, your bank will no longer be able to make back all its money if it needs to seize your home. But if your LTV is 60%, prices can fall, and your lender still won’t have to worry about losing its investment.

How do I calculate my loan-to-value ratio?

It’s simple to calculate your loan-to-value ratio. Divide the amount you need to borrow by the total value of the property, then multiply the result by 100 to get a percentage, as you can see in these examples:.

Let’s say, for example, that you’ve saved up £30,000 for a deposit and you want to buy a home worth £250,000. That means you’ll need to borrow the remaining £220,000. So, 220,000 divided by 250,000 equals 0.88, meaning that your LTV is 88%.

With such a high LTV, it might be difficult to take advantage of the best deals and you may be given a more expensive interest rate.

But if you were to find another property worth £140,000, you’d only need to borrow £110,000. Repeating the calculation, 110,000 divided by 140,000 is just under 0.786. So, your LTV is a much healthier 78.6%. At this rate you are more likely to get a mortgage with a lower interest rate, saving you money overall.

What is a loan-to-value band?

Usually, lenders divide their mortgage deals into different LTV bands. These generally rise in increments of 5%, and with every band, you’ll be able to qualify for a new rate.

This means if you have the possibility to put down a bigger deposit or simply find a more affordable property, you may manage to be part of a lower LTV band. Not only will this provide you with a more favourable rate overall, but it could also help you save a considerable amount of money in the long term.

What is a 'good' loan-to-value ratio?

Ideally, your ideal loan-to-value ratio should be somewhere under 80 % because anything above 80% is considered a high LTV. However, this might not always be possible and there are plenty of mortgages available for people with LTVs at 80%, 90%, or even 95%.

Just be aware if you have a higher LTV you’ll be paying much more on interest and you’ll own less of the property.

It works the other way too. An LTV of 60% is better than 70%, and if your LTV is even smaller, you could get access to much lower interest rates.

Of course, getting a mortgage with a higher LTV will allow you to get on the property ladder quicker. If house prices go up faster than the value of your savings, your LTV could be rising the longer you wait.

So, it might be worth getting a mortgage with a high loan-to-value ratio. Then, you can see if you can bring it down once you’re in your new home.

How can I lower my LTV ratio?

Reducing your LTV means you should get access to lower interest rates on your mortgage. So, it’s useful to get that number as low as possible. There are a number of aspects that can act to reduce your loan-to-value ratio:

Can I take out a 100% LTV mortgage?

Yes, you should be able to, even though there are few mortgage lenders that offer these types of deals. If you decide to take out a 100% LTV mortgage, meaning that you’re paying no deposit, you will almost certainly need a guarantor.

A guarantor is someone who will have to repay your monthly mortgage instalments if you’re not able to do so yourself. Generally, it will be a parent, grandparent, or very close relative or friend.

This type of mortgage can be useful if you’re eager to get yourself on the property ladder, especially if you don’t have enough funds for a deposit.

But bear in mind that it can also be a risky option, as your guarantor may end up paying a substantial amount of money if you can’t repay your debt. In the worst case scenario, their house may also be repossessed if the debt is unable to be repaid.

How does my loan-to-value ratio work with a remortgage?

As you pay off your mortgage, your share of the property will gradually increase. So, when you decide to remortgage, your LTV won’t be the same as it was when you first bought the home.

If house prices have increased, this will lower your LTV even further. This is because the value of the property is bigger relative to your loan. But if the value of your property goes down, it could wipe out your repayments. It may even mean your LTV is higher than it was.

If you’re looking to remortgage, it might be worth making a few lump-sum overpayments into your mortgage to knock your LTV down a percentage point or two. That way, you can get a better deal. Some mortgage providers sort LTVs into bands, so reducing the ratio from 80% to 79% could make all the difference.

Another option is to get a remortgage for a higher amount. This way, your LTV stays the same, but you get some extra cash for a home renovation or another big expense. But keep in mind that doing this will mean you pay more for your mortgage every month. Not only that, but you’ll also stay in debt for longer.

Compare mortgages with MoneySuperMarket

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Even if you have a high LTV, there are plenty of products out there that can help you make your dream home a reality for less. Try it now and see how much you could save.

Your home may be repossessed if you do not keep up repayments on your mortgage.