What is a loan-to-value (LTV) ratio?
We talk a lot in our guides about loan-to-value (LTV) ratios and their influence on mortgage applications, but what does LTV mean and why is it significant?
What does loan-to-value mean?
Loan is the mortgage size. Value is the cost of the property you’re buying. So, the definition of LTV is how much you borrow versus how much you’re buying a home for. The ratio is then calculated as a percentage.
How to calculate your LTV
You can use our calculator below to work out your LTV. Remember to factor in the amount of deposit you have when inputting the amount you need to borrow.
This calculator will tell you what your loan-to-value (LTV) ratio is, based on the property's value, your deposit/equity and the amount you're borrowing.
Your LTV is
This means that most mortgage providers will consider your deposit amount to be more than satisfactory, but speaking to a broker is still recommended to ensure you get the best deal.
This means you’re likely to meet the deposit requirements at most lenders, but since many reserve their best rates for those with higher deposits, speaking to a broker is recommended.
Many mainstream mortgage providers would consider this high and be reluctant to lend. Applying through a mortgage broker may be necessary to find a specialist low deposit mortgage lender.
LTVs have a direct impact on the rates available to you - speak to a mortgage broker and find out how to get the best deal based on your ratio.
To work out what your loan-to-value is, use this sum:
LOAN ÷ TOTAL COST OF PROPERTY x 100
EG) 75,000 ÷ 100,000 x 100 = 75 (LTV is 75%)
Why is it important?
Your LTV ratio will have an impact on the deal you will get on your mortgage. Lenders generally offer better interest rates to people who don’t need to borrow as much on their property – who have a lower LTV ratio – and so your overall debt is low.
Why? A lower loan-to-value ratio provides more security if house prices fall. If the bank has given you a high LTV mortgage and then your house is suddenly worth less than the loan amount, the bank will not be able to recoup their investment money in your home if you fail to make the repayments.
Preferable loan-to-value ratios
Ideally, the better rates come when your LTV ratio is below 80%. While you might be able to get a mortgage on higher – 90 or 95% or even a no deposit mortgage – this would be classed as a high loan-to-value ratio, and interest rates will also be higher to mitigate the risk involved.
Decisions that could affect your LTV
The ability to have a low loan-to-value in the first place relies on many factors, not least your personal circumstance, the house you want to buy or how quickly you want to get a mortgage. Some people may never envisage a time when they could save enough of a deposit to get a decent LTV ratio anyway, and may be willing to pay the extra cost of the mortgage over time in order to get the home they really want.
If you’d rather reduce your LTV in order to get those favourable rates, there are a number of moves you could make:
- Consider a cheaper house: If the home you want comes with a more expensive mortgage, you could reconsider how much you are willing to spend on a property. Lowering your expectations may result in a far better mortgage deal, which has a long-term financial bearing on your life.
- Saving more: If it’s a possibility for you to save a bigger deposit, this will mean you have more equity to put into your home, therefore gaining a lower LTV ratio is more likely. If this is going to take time, consider whether rising house prices will offset this saving.
- Type of mortgage: If you take on a repayment mortgage, you will pay back your loan gradually over time, which starts to tip the balance of your loan ratio, leaving you owning more than your debt. You could consider overpaying your mortgage if you are able to, which will speed this up.
- Investing: If you put money into your property, you may find that it increases its value, which then changes the LTV ratio. This is also the case for buying a home in an area where house prices are rapidly increasing, such as places with regeneration.
- Working with a mortgage broker: Specialist advisors are a great first port-of-call when it comes to understanding how loan-to-value ratios work. They understand how individuals’ circumstances can alter their mortgage terms, which lenders are the most flexible, and where the best deals are to be had, which could ultimately result in you securing a cheaper mortgage.