What Is LTV? Why Is LTV Important?
Loan to value ratio or LTV, is a measure of how much money you will be borrowing against the value of the property being put forward as collateral to the lender. Or from the lender’s perspective, it is a measure of the maximum % amount of mortgage they will consider lending you on any given mortgage product.
Generally speaking, the lower your LTV is, the more attractive you will be to a potential lender which can mean you gain access to their best mortgage rates.
How is LTV calculated?
Working out LTV is a simple calculation. Take what you want to borrow (or already owe) and divide by the value of the property.
Property value = £ 300,000
Mortgage = £ 225,000
LTV = £ 225,000 divided by £ 300,000
LTV = 75%
There is no need to do the calculation yourself, however. Use our LTV mortgage calculator below, for an instant calculation of LTV.
How does LTV change my mortgage options?
First and foremost, LTV will put a maximum on how much you can borrow for a particular mortgage deal. Lenders will typically arrange their mortgage offers into LTV tiers to reflect how risky they feel each customer is. The lower the LTV, the better the rate the lender will offer as they view you as having less chance of falling into payment arrears and should that happen, they have more chance of recovering all of their money through a repossession.
Is my LTV good?
Below is a table of the typical LTV tiers used by lenders. Alongside each we have provided some anecdotal commentary to give you an idea of how a lender may structure their mortgage product catalogue as well as how they may change their attitude to risk. This will vary from lender to lender so please take this as a guide only:
|% to be paid
|Up to ￡250,000
|￡250,001 to ￡400,000
|￡4001,001 to ￡750,000
|￡750,000 to ￡1,500,000
|￡1,500,001 and over
How does LTV affect lending criteria?
As already mentioned, lenders usually offer their most competitive mortgage deals to borrowers they consider lowest risk. In order to lend to as many people as possible in these low risk categories it is not uncommon for a lender to become more flexible on who they will lend to or what type of property they will lend against.
A few examples are:
- lower credit score required
- more willing/able to accept bonus or commission income
- able to consider an interest only mortgage
- able to lend on a high rise flat or ex-council building
- willing to consider a short term contract worker
- less trading history required for self employed borrowers
- willing to accept borrowers who do not have permanent rights to reside in the UK
The list above is not exhaustive and of course it always comes down to the individual situation. But if you think you fall into the category of being a ‘complicated’ borrower then aiming to reduce your LTV ratio could open up some more options.
What LTV mortgages are there?
Having a deposit of over 40%, means you will have access to the cheapest mortgage rates. With a deposit of under 10%, you will be offered mortgages with the highest rates.
Here’s a summary of different LTV mortgages.
Low LTV mortgages
Mid-range LTV mortgages
High LTV mortgages
With these High LTV mortgages, you won’t need a hefty deposit, but you will have to pay the more expensive rates.100% mortgages are rare and risky and may require guarantors. First time buyers often take high LTV mortgages as they offer them the opportunity to get on the property ladder without a large deposit.
How to improve your loan-to-value ratio
It is beneficial to try to reduce your LTV ratio as much as possible as ultimately it dictates how much you are allowed to borrow, what interest rate you will be charged and how much your property will cost in total over your repayment period.
- Wait until you have a significant deposit
If your deposit is less than you need to reach a particular LTV threshold, saving for an extra few months could make a significant difference. Waiting until you qualify for a better value loan can save thousands of pounds in the long run.
- Try to negotiate the property price with seller
If you have found the perfect property and are reluctant to wait until you have saved a bigger deposit, you could negotiate with the seller to bring the price down.
Just a small reduction in the property price could be enough to put you in a more favourable loan-to-value band, which will save you money and also improve your LTV.
What happens to your LTV ratio over time?
Your LTV ratio won’t stay the same for long. As house prices fluctuate, your LTV ratio will go up or down, without making any difference to the debt itself.
Loan-to-value will usually decrease slightly with each repayment made but as mentioned, this also depends on property prices.
As your LTV ratio improves throughout your mortgage term, you may be able to renegotiate with your lender for a better interest rate.
It is good financial health practice to regularly check your loan-to- value and explore opportunities for a better mortgage deal.
So what about High LTV mortgages?
It is not unusual, particularly for first time buyers, to have access to a smaller deposit. This will often mean you are restricted to 90% LTV mortgage or 95% LTV mortgages. Whilst this puts your into one of the higher risk categories it doesn’t mean it’s all doom and gloom!
There are several lenders now willing to offer loans up to 95% LTV, the tough part is making sure you can step through the hoops they put in place with their strict lending criteria. You can read our guide which will help explain what you will need to have in place before considering an application.
In the past, lenders would even consider 100% LTV mortgages. However, after the financial crisis of 2008 these are no longer widely available.
How can I avoid a high LTV?
If you have some time and are not in a rush to buy, it is worth taking a few extra months to save as much money as possible. Having a decent deposit is the best way to avoid having a high LTV.
Secondly, don’t overstretch yourself and stick to looking at properties with lower asking prices.
Buy to let LTV
Buy to let mortgages are more complex than standard residential loans and lenders see them as a higher risk. As a result the maximum LTV available is typically around 75% to 80% of the property value.
You can review our guide to buy to let for more information.
New build LTV
Some lenders also see mortgages for newly built property as a higher risk so be sure to keep this in mind if you have a small deposit.
Loan to value or LTV plays a large role in defining maximum borrowing amounts available. It also has an impact on the flexibility a lender is willing to offer when it comes to deciding if they will lend to you in the first place. Use our LTV calculator to give you an understanding of what options could be available and when you are ready, just get in touch with us for some free mortgage advice.