What is a loan to value ratio?

What is LTV?

LTV is the initialism for the term Loan to Value. The LTV is the ratio of the loan or borrowing amount in relation to the property value or purchase price. For example, a mortgage of £100,000 on a property worth £200,000 is a 50% LTV.

1. Why is loan to value important?
2. How to calculate your LTV
3. Does your loan to value affect interest rates?
4. Can you lower your LTV?
5. Remortgaging and Loan To Value

Why is loan to value important?

Your loan to value can play a significant part to a number of things in relation to your mortgage. The first and perhaps most common is its use to determine the interest rate a lender offers you. The lower your LTV the lower the rate offered and the higher the LTV the higher the interest rate.

The LTV can also be significant in either being approved or not for your loan.  This could be in context of the condition of the property i.e. the worse state of repair the better chances a lender will approve your loan if it is a lower loan to value. The other is in regard to credit risk.  If you have a history of bad credit, then a lower loan to value could assist.

How to calculate your LTV

The LTV is calculated using the borrowing amount in relation to the property value or purchase price.  The example below, using a loan amount of £150,000 on a property value of £200,000, demonstrates how this works:

£150,000 divided by £200,000 = 0.75 multiplied by 100 = 75

Therefore, this scenario gives a loan to value of 75%.  This would be expressed as 75% LTV.

Does your loan to value affect interest rates?

Your loan to value will be a contributing factor to the interest rates you are offered. Lenders will typically offer a lower rate to those with a lower LTV.  These are usually set within 5% equity or deposit tiers such as for those with 10% or less deposit or equity, those who have 15% and so on.

This can be especially important to note if you are on the cusp of the next bracket i.e. if you have an 86% LTV you will get the same rate as someone who has a 90% LTV. Therefore, if are you able to get this to 85% that may afford you a better interest rate.

What’s a good LTV ratio?

Most regard a 75% LTV as the lowest benchmark i.e. if you have a 75% loan to value you should be able to access some of the best rates and have a better degree of flexibility with an underwriter’s assessment of risk.  It can also be the starting point for access to buy to let mortgages.

However, LTV cannot simply be plucked from thin air and changed on a whim.  As it will be determined by the value of the property and how much you need to borrow there is little that can be done about these factors in many instances.

Therefore, a good LTV is one that works for you and your own personal situation, whilst acknowledging that the lower you are able to make it the better it could be for you.

Can you lower your LTV?

It is possible to lower your LTV but to do so will not always be possible for you and your circumstances. As it is determined by the borrowing amount and the value of the property, it is these two factors that you need to be able to alter.

With the borrowing amount, if this needs to be reduced this will have to be done by means of an extra capital injection i.e. savings or possibly a gift.  The value of a property is more difficult to change and in the most part is going to be dictated by the property market.  However just by ensuring your property is well maintained can be of use.

Remortgaging and Loan To Value

When considering a remortgage your LTV will play its part. The interest rate available to you will be determined by this so it is worthwhile having an idea of what you feel the property is valued at.  Today many lenders will carry out online valuations or desktop surveys, where they will value a property using their huge data banks.

If you have carried out any changes or improvements since you have purchased the property or last arranged a mortgage on it, you are advised to ensure this is noted by the lender so it can be taken into consideration.

Should I speak to a mortgage broker?

Getting your LTV correct and knowing how the level of this can impact upon your mortgage rate, or indeed even just your success of approval, is vital.  Using the services of a mortgage broker can be invaluable.

Many could have much more experience in the current property market than yourself and they may also have valuation tools available to them to check on a particular property’s value.  More importantly these are often the same tools as those used by the lenders so you can have an idea of what to expect should you apply.