Loan-to-value, often abbreviated to LTV, is a crucial element of a mortgage deal that can determine what interest rate you’re offered. There are two factors that decide your LTV, one being the size of your deposit and the other being the price of your property. Learning how to work out your LTV and how it affects your mortgage rate can help you make important decisions regarding your mortgage or remortgage. In this guide, we explain what LTV is, how to work it out, how it affects your mortgage rate, what a good LTV is, and much more.
What is LTV On a Mortgage?
Loan-to-value (LTV) is a ratio that illustrates how much of a property’s value will be covered by the mortgage loan (with the remainder being covered by the deposit). An LTV ratio is always presented as a percentage rather than a true ratio.
Lenders use the LTV ratio to determine the risk level of a particular loan and then calculate the interest rate and terms they are willing to offer. A higher LTV is considered a higher risk to the lender. This is because if the property value were to fall below the loan amount and the lender had to repossess and sell the property, they may lose money. The opposite is also true, a lower LTV is considered less risky to the lender because they are less likely to lose money.
How is LTV Worked Out For Mortgages?
Working out loan-to-value is fairly straightforward. Here are the 4 steps to calculate the loan-to-value of your mortgage:
- Determine the property’s value. This is typically done using a professional valuation.
- Calculate the loan amount. Subtract your deposit from the property’s value.
- Divide the loan amount by the property’s value. This will give you a decimal.
- Multiply the decimal by 100. This converts the decimal into a percentage, and this percentage is your LTV.
Example Loan-to-Value Calculation
Let’s have a look at an example to help illustrate the steps above. This property costs £400,000 and the buyer has a £100,000 deposit.
- Property Value = £400,000
- Loan Amount = £300,000 (£400,000 – £100,000 deposit)
- Loan Amount / Property Value = 0.75
- 0.75 x 100 = 75%
The loan-to-value of this mortgage would be 75%.
How Does the LTV of a Mortgage Relate to the Deposit?
As you may have gathered from the section above, the deposit is essentially the other side of the coin to the loan-to-value. In other words, it accounts for the other side of the same ratio. Where the loan-to-value is the percentage of the property’s value that you have to get a loan for, the deposit is the percentage of the property’s value that you DON’T have to get a loan for. So in the example above, the LTV is 75% and the deposit is 25% (together they always make 100%).
If you know what percentage your deposit is, you can very quickly work out what your LTV will be by subtracting your deposit percentage from 100. For example, if you had a 10% deposit, your LTV would be 90%. If you had a 20% deposit, your LTV would be 80%.
How Does the LTV Affect Mortgage Rates?
Your loan-to-value is a crucial factor that lenders consider when determining your mortgage rate. Generally, borrowers with a lower LTV (meaning a larger deposit) are offered more favourable interest rates. This is because they represent a lower risk to the lender. Conversely, borrowers with a higher LTV (a smaller deposit) may face higher interest rates to compensate for the increased risk. We’ll explain what classes as a high or low LTV a bit later in this guide.
How Else Does the LTV Affect My Mortgage Options?
Having a high LTV may slightly limit your options overall but providing you pass affordability and credit checks you should have deals available to you. That being said, affordability and credit checks may be stricter for those with higher LTVs, so having a larger income and good credit will help in these cases.
What is a Good LTV in the UK?
As a general rule of thumb, anything below 80% might be considered a good LTV and should open you up to lower rates. Anything above 80% is generally considered a high LTV, but it’s not uncommon to take out a mortgage with a 90% or even 95% LTV.
Remember, on a repayment mortgage you’ll be working towards reducing your LTV over time by paying off your debt. Also, if the value of your house rises this will help to lower your LTV as well. So if you only have a relatively small deposit, don’t be put off buying the home you want just because the LTV is considered high – high LTVs are normal and you shouldn’t necessarily see them as a ‘bad’ deal. As long as you keep up with your repayments, doing whatever you need to do to get on the property ladder or upsize can be a financially savvy move in the long run.
What is the Highest LTV I Can Get in the UK?
Generally, the highest loan-to-value lenders will allow in the UK is 95%. With a 95% mortgage, you’d only need a 5% deposit. However, such a high LTV isn’t available to everyone. Lenders will usually require you to have an excellent credit score and a high income to qualify for these deals, and they may also assess the property type and location when making you an offer.
There is one 100% LTV mortgage available in the UK, but this has very specific eligibility criteria. You can learn more about the 100% mortgage in our guide, ‘Can I Get a No Deposit Mortgage – 100% Mortgages Explained’.
Should I Remortgage if My LTV Has Been Reduced?
As mentioned earlier, you should expect to reduce your LTV over time. This is especially true if you have a repayment mortgage because you’ll be gradually paying off your mortgage balance. However, although not guaranteed, the greatest change to your LTV could come from an increase in your home’s value. If your LTV has dropped, it’s worth speaking to a mortgage broker to see if you’re now eligible for a better deal. Your advisor will be able to search the market to see what’s available to you and also advise you as to whether now is a good time to remortgage or not.
The Bottom Line
Loan-to-value is a ratio that illustrates how much of your property’s purchase price will be covered by the mortgage. The LTV ratio is presented as a percentage. It is essentially the other side of the coin to the deposit – where the deposit represents the percentage of the property’s price that is not covered by the mortgage. So if you have a 20% deposit, your LTV will be 80%.
Another way to work out your LTV is to divide the loan amount (how much you’ll borrow) by the property value (price of the property) and then multiply the answer by 100. You can see an example of this calculation earlier in this guide.
LTV is a crucial metric that lenders use to analyse your risk profile. Generally, the lower your LTV, the lower your interest rate might be. That being said, having a high LTV shouldn’t put you off getting on the property ladder or upsizing. As long as you keep up with repayments, your LTV should decrease over time, and this can be accelerated if the value of your home increases. As your LTV falls, you may be able to remortgage to a cheaper deal, so be sure to speak to a mortgage broker every couple of years or at the end of your current deal, to reassess your options.
At Michael Usher Mortgage Services, we’ve been helping people throughout Surrey, Hampshire and Berkshire for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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