Mortgage loan-to-value ratios
When it comes to taking out a mortgage, the loan-to-value ratio is all-important and affects the interest rate you can get. Read our ‘LTV Meaning’ guide to learn all you need to know.
LTV meaning: what is a loan-to-value ratio?
Loan to value (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%.
Working out your loan-to-value ratio is important for any kind of secured loan. But you’re most likely to encounter it when you’re applying for a mortgage. 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.
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. Thanks to the government’s guarantee scheme, you can get a 95% LTV mortgage. This 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 that lenders consider when they decide whether to approve you for a mortgage or not. This is 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.
Because lower LTVs are less risky for providers, they’ll usually give better terms to people who can put down bigger deposits relative to the home they’re buying. If your LTV is low, odds are you’ll be charged less interest. This means it can be much cheaper to borrow the same amount of money if there’s a lower LTV.
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.
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. Therefore, you might end up looking elsewhere. If you find another property worth £140,000, you’d only need to borrow £110,000. Repeating the calculation, 110,000 divided by 140,000 comes to just under 0.786. So, your LTV is a much healthier 78.6%.
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?
As a general rule of thumb, your ideal loan-to-value ratio should be somewhere under 80%. Anything above 80% is considered a high LTV. There are plenty of mortgages available for people with LTVs at 80%, 90%, or even 95%, but you’ll be paying much more on interest.
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:
Repayment mortgage – with a mortgage on a repayment basis, your LTV will gradually go down over time as you slowly pay back the money you’ve borrowed. You can even speed up this process by making overpayments on your mortgage. Then, when it’s time to remortgage, you can take advantage of lower rates
Rising house prices – if the value of your property goes up, the portion covered by your mortgage goes down, lowering your LTV. In general, house prices tend to increase over time. But investing in some repairs, renovations, or even a few DIY projects could potentially push it up higher. You could then get an independent valuation to see if your LTV has improved
Save a bigger deposit – the most reliable way to get a lower LTV is to save up for a bigger deposit before you buy a property. As long as your savings are growing faster than house prices, every month you save will make your mortgage cheaper in the long run
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 financially-risk option, as your guarantor may end up paying a substantial amount of money if you can’t repay your debt.
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.
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