When you borrow money to buy a home, the loan is typically expressed as a percentage of the property’s value. This is known as the loan-to-value ratio (LTV). Lenders look at your LTV when deciding if they’ll accept your mortgage application – the lower, the better.
Your LTV will come up whenever you look to remortgage or if you’re a first-time buyer, as it directly affects the amount of equity you have in your property. Equity is the portion of your property’s value that you own outright and it can provide a cushion against financial hardship if you ever need to sell the property or refinance the mortgage at a future date.
HOW TO CALCULATE LTV
For example, let’s say you’re buying a £400,000 property and you need a £380,000 mortgage. Your LTV ratio would be 95% (£400,000 divided by £380,000).
5% deposit
95% mortgage
That means you have 5% equity in your home. If your loan to value ratio is high, it means you have less equity in your home. This can be a problem if you need to sell your home or refinance your mortgage, because you may not have sufficient equity to qualify for a loan.
It can also be a problem if your home value decreases because you could end up owing more than your property is worth (known as being in ‘negative equity’ on your mortgage).
That’s why it’s generally a good idea to keep your loan to value ratio as low as possible. One way to do this is to have a larger deposit when you purchase your home. Another way is to wait until your home value goes up before refinancing your current mortgage.
If you’re considering taking out a mortgage, make sure you understand how the LTV ratio will affect your loan. It’s an important factor to consider when you’re looking to get the best deal.
If your LTV is above 75% then look carefully for any Higher Lending Charges, payable to the lender.
LTV Calculator
This simple calculator will quickly work out your loan to value (LTV) percentage. Just enter the property value, or purchase price, and the mortgage amount you need.
3 REASONS YOUR LTV COULD CHANGE
SAVING FOR A HIGHER DEPOSIT
The more deposit you have saved, the more of your property you will own from the start – meaning you will need to borrow less to buy it. It can also mean you are able to access more competitive mortgage deals with lower interest rates.
This will impact on what interest rate you are offered and how expensive your monthly repayments are. Typically, the larger deposit saved, the lower your repayments, term and interest rate will be. This is because the more money you have to put towards your property purchase, the less of a risk you pose to the lender.
OVERPAYING YOUR MORTGAGE
Overpaying your mortgage means your debt reduces more quickly and this is reflected in the loan to value percentage. And if your LTV falls, it means when it comes to remortgaging, you may be able to obtain a more competitive deal than if you hadn’t overpaid.
Also, having more equity in your home could give you a cushion if you ever faced difficult financial times, so it gives you more options. It’s worth remembering, too, that overpaying your mortgage can be an effective way to save money on interest and clear your mortgage loan sooner.
CHOOSING TO REMORTGAGE
If you’re looking to remortgage and want to secure the most competitive deal possible for your situation, it’s important to think about your LTV. It can affect the interest rate you’re offered and the amount you’re able to borrow.
With a repayment mortgage your balance will be slowly reducing each month, couple that with an increase in property prices then your LTV will be lower than it was when you first took out your mortgage. This means that other deals may now be available, with lower interest rates because your house value has increased.
The rates that lenders offer are based on a loan to value percentage that has steps of 5%.
For example:
- 95%
- 90%
- 85%
- 80%
- 75% etc
So in a super rare example, if the amount of deposit you had added up to 9.5% of the property value, you would get a better deal (and save interest) if you could squeeze a bit more and make it a 10% deposit.
It would be a good idea to discuss your loan to value with a whole of market mortgage broker before you commit to a specific house to see what deals are available.
