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What is LTV? Mortgage Loan to Value Explained
When applying for a mortgage, one of the key factors that lenders consider is your loan to value (LTV) ratio. Your LTV represents the amount of money you're borrowing in relation to the value of the property you're purchasing.
In other words, it helps lenders assess the risk associated with providing you with a mortgage and affects the interest rates they'll offer you.
In this article, we delve deeper into LTV ratios, how they're calculated, and how they affect your mortgage.
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What is a Loan to Value Ratio?
How LTV Ratios Affect the Mortgage Process
3 Factors That Can Affect Your LTV Ratio
Can You Get A Mortgage With A High LTV Ratio
Can LTV Ratios Change Over Time?
What is a LTV Ratio for Remortgaging?
What is a Loan to Value Ratio?
A loan-to-value ratio is a financial term used to describe the relationship between the value of your property and the amount of money you're borrowing to purchase it. It's expressed as a percentage, which you calculate by dividing your loan amount by your property value.
For example, if you're looking to purchase a property worth £200,000 and have secured a mortgage of £160,000, your LTV ratio would be 80%. This means you are borrowing 80% of the property value and will be required to provide a deposit of the remaining 20% (£40,000 in this case).
How your LTV Ratio Affects your Mortgage
LTV ratios are important to lenders because they help assess the risk associated with giving you a mortgage. In general, the higher your LTV ratio, the riskier your loan is perceived to be. This is because a higher LTV ratio indicates that you have less equity in your property and may be more likely to default on your loan:
- As a result, lenders often have stricter requirements for borrowers with high LTV ratios and may charge a higher interest rate on high LTV mortgages to compensate.
- On the other hand, if you have a lower LTV ratio, you may be seen as less risky and offered more favourable terms.
It's worth noting that LTV ratios can also affect the mortgage products available to borrowers. For example, some lenders may have specific mortgage products only available to borrowers with an LTV ratio below a certain threshold.
This is why small differences to your LTV ratio can play a big part in the mortgage you're offered. It can make a big difference if you're pushed into a higher or lower LTV band or threshold.
How to Calculate Your LTV Ratio
If you're planning to apply for a mortgage, it can be helpful to calculate your own LTV ratio to get an idea of what to expect. Here's a simple formula you can use:
- LTV ratio = (Mortgage amount / Property value) x 100
For example, let's say you're looking to purchase a property worth £300,000, and you've secured a mortgage of £240,000. Your LTV ratio is calculated as follows:
- LTV ratio = (£240,000 / £300,000) x 100 = 80%
3 Factors That Can Affect Your LTV Ratio
Three key factors affect your LTV ratio and, in turn, the terms of your mortgage:
1. Deposit: As mentioned earlier, the size of your deposit directly impacts your LTV ratio. A larger deposit means a lower LTV ratio, which could result in more favourable interest rates.
If you're remortgaging, the amount of equity you've paid off in your home already will technically affect your 'deposit' size in the same way - the more, the better.
2. Property value: The value of the property you want to purchase also impacts your LTV ratio. If your property gets valued at a higher price, your LTV ratio will be lower, even if your loan amount is the same.
If you're remortgaging and your house has gone up in value, it could now be worth more in relation to your mortgage - so you could have a lower LTV than when you first bought your property.
3. Loan amount: The more you borrow, the higher your LTV will be for the same property.
What is a Good LTV Ratio?
The ideal LTV ratio will depend on your specific circumstances and the lender's requirements. In general, however, a lower LTV ratio is considered more favourable, as it indicates that you have a more significant amount of equity in your property and may be less likely to default on your mortgage.
That being said, a good LTV ratio will also depend on the type of mortgage you are seeking. If you're a first time buyer, some lenders are more flexible with their LTV ratios, for example.
Can You Get a Mortgage with a High LTV Ratio?
While it may be more challenging to secure a mortgage with a high LTV ratio, it's not impossible. Some lenders provide mortgages to borrowers with high LTV ratios - some even up to 95% LTV mortgages - but may charge a higher interest rate to compensate for the increased risk.
Can LTV Ratios Change Over Time?
Your LTV ratio can change over time, but it only affects your mortgage when you take out a new deal or remortgage.
When you take out a new product or remortgage completely, your LTV and affordability are reassessed, so it's at this point that it will affect your mortgage rates.
For example, suppose the value of your property increases. In that case, your LTV ratio would decrease as your loan becomes smaller than your home's value.
This could happen if you improve your property through renovations and refurbishments or if the market value of similar properties in the area increases.
On the other hand, if the value of your property decreases, for example, in response to a market downturn, your loan to value could go up.
If the value of your home has increased and you're considering remortgaging at a better LTV, watch our video below on whether it's worth it:
What is a LTV Ratio for Remortgaging?
The LTV ratio is also an important factor to consider when refinancing a mortgage. When remortgaging, the LTV ratio is calculated using the same formula as when you originally applied for your mortgage.
In general, lenders prefer lower LTV ratios when you're remortgaging, as this indicates that you have built up more equity in your property. Some lenders may have specific LTV requirements for remortgaging, so it's important to check with your lender or a mortgage broker before you make a decision.
Usually, remortgaging is a good opportunity to get a new mortgage at a better LTV (and therefore potentially a better interest rate) than your previous mortgage because either:
- you've built equity in the value of your home through your mortgage repayments, so you need to borrow less
- or the value of your property has increased, meaning your new mortgage will be a smaller percentage of your property value
However, this isn't always the case, and you also need to be aware of Early Repayment Charges (ERCs) that can apply if you end your mortgage deal before its term. If you're unsure what the best option for you is, you should speak to a mortgage adviser for help.
An expert mortgage advisor can provide you with all your options in an often confusing and increasingly competitive market.
We can help you better understand these options and find you a bespoke deal, whether you're a first-time buyer or looking to refinance.
Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below.
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