What is a loan-to-value ratio?
Before applying for a mortgage, you need to understand the loan-to-value ratio. You’ll often hear it called your LTV. And what it means is the amount of money you need to borrow compared to value of the property.
It is important to understand your LTV as it is likely impact the interest you pay on your mortgage. If you have to borrow a larger amount of money compared to your home’s value, you will likely pay higher interest.
If you don’t know about LTV ratios, then you’re not alone. A study last year found that 64% of first-time buyers didn’t know about LTV and the fact they can access higher loan-to-value mortgages.
Mortgage lenders care about your LTV because the more you borrow compared to the property’s value the higher the risk for the lender.
It can be a bigger risk for them if house prices start falling. If that happens you could end up being ‘negative equity’. This means you’ll owe more than your house is worth on the market if you were to sell it. We’ve covered mortgage equity before, so check out the blog.
Calculating your loan-to-value ratio
It’s not difficult to work out your LTV ratio. For first-time buyers, you deduct the amount you have for a deposit and then work out the difference between the remaining value and your mortgage. This then gives you a percentage, which is your LTV ratio.
For example:
The house you want to buy is worth £150,000
You have £15,000 for a deposit.
The mortgage you require is £135,000.
To work out your LTV you divide 135,000 by 150,000, which equals 0.9.
Times this by 100 and your LTV is 90%.
This means you’ll need a mortgage that is worth 90% of the property’s value.
If you are not a first-time buyer, you simply work out what mortgage you have left to pay and compare it to the property’s latest valuation.
Here is an example:
Your house is valued at £214,900.
The balance (what you have left to pay) is £62,500.
That means the equity you have in the property is £152,400.
The LTV ratio is 29%
Interest rates and LTV
The lower your loan-to-value ratio the better because lenders will offer their cheapest interest rates to those with a low LTV. Lenders’ mortgage products usually have a maximum loan-to-value ratio in bands. These are normally:
60% (These mortgages are usually offered at the best rate)
70%
75%
80%
90%
95%
It is possible to secure a 100% mortgage (meaning you borrow the full amount of what the property is worth) but these deals are rare. We can access lenders who will give 99% LTV with a £5,000 deposit.
And there there is a lender we can access that offers a 100% LTV mortgage product. The interest rate is higher and there are strict requirements to meet. For example, you need to be able to demonstrate a track record of paying monthly rent for at least 12 months in the past 18 months.
Can I improve my LTV?
If you improve your LTV, it increases the chances of finding a mortgage with better interest rates. If you’re a first-time buyer, you could increase your deposit.
Let’s say you currently have a deposit that’s worth 5% of your desired home’s value. If you can save another 5% you’d have 10% deposit, which means you’ll pay less interest as you’ll be in the 90% LTV band rather than 95%.
It may not be a lot of difference, but every penny helps.
Anyone currently paying a mortgage could make overpayments. That means you pay an extra amount to your normal monthly payments to reduce what you owe. When you remortgage, your mortgage is lower and – unless the market falls drastically – you’ll have a lower LTV.
If house prices are rising, your property will be worth more which also means your LTV ratio increases. This could mean you can remortgage at a lower LTV band, which should mean you’re offered a mortgage deal with a lower interest rate.
Looking for a mortgage deal?
If you’re looking for a new mortgage or remortgage, then we can help. Contact our team today.
No matter what your LTV ratio is, your home may be repossessed if you do not keep up repayments on your mortgage.
