What is loan to value? How does this common financing phrase affect your mortgage options and the overall amount of money you can borrow? Read on, and find out why your loan-to-value ratio is such an important factor.
What is loan to value?
The loan to value (LTV) ratio is a measure used by mortgage lenders to determine the level of risk of any mortgage product they may choose to offer. Simply put, it shows how much money is being borrowed, compared to the value of the property.
The higher the LTV, the riskier that loan could be for the lender. This is because the more money they lend, they more they stand to lose if the borrower can’t repay the mortgage.
How do you calculate loan to value?
To calculate the LTV on your mortgage, simply divide the mortgage amount by the current value of the property. Then multiply by 100 for a percentage.
For example, if your mortgage is £400,000 and your home is worth £500,000, the LTV is 80%.
Does LTV affect a mortgage’s interest rate?
LTV is important because it does affect the interest rate of any mortgage product you might be offered. Banks and mortgage lenders generally use ‘risk-based pricing’ when deciding what kind of mortgage loan they might offer you.
Since mortgages with higher LTV ratios represent more risk for them, lenders usually attach higher interest rates. In contrast, if the LTV is low, they will feel more comfortable offering a lower interest rate. This is because even if you are forced to sell your property, it’s more likely that the sale price will cover the outstanding mortgage.
What does loan to value mean for my mortgage refinancing?
If you want to refinance your mortgage, your current loan to value will affect your refinancing options. LTV ratios change as your property becomes more or less valuable, and if you are repaying your mortgage. If your LTV goes down – because your property has appreciated in value, and/or you are steadily paying off the loan – then you may have access to better interest rates and more flexible mortgage products when it comes to refinancing.
Similarly, if your LTV goes up – if, say, your property has fallen in value and you’re on an interest-only mortgage – then your refinancing options will probably be more limited and expensive.
What is a good loan to value mortgage ratio to aim for?
Generally, 80% or lower is a good minimum ratio to aim for. However, the lower the loan to value mortgage ratio the better.
At the end of 2020, the average LTV for UK buyers was 74%, going up to 82% for first-time buyers. This suggests that UK mortgage lenders see 75-80% LTV as a generally acceptable level of risk.
What is the maximum loan to value?
In the UK, most lenders will not offer to lend much more than 80% of the property’s value without attaching much higher interest rates. However, the maximum loan to value ratio allowable depends on the individual mortgage lender.
Some lenders do specialise in mortgage loans for first-time buyers or buy-to-let landlords. These lenders will allow LTV ratios of around 90-95%, or even higher.
Can I get a 100% LTV mortgage?
It is possible to get a 100% LTV mortgage in the UK, as many lenders do offer these ‘no-deposit’ products. However, there is almost always a steep interest rate attached, and you may need a guarantor.
It’s even possible to secure a mortgage with an LTV that is over 100%. This is where you take on a mortgage without putting up a deposit, and the mortgage provider lends you an additional lump sum. For example, a 105% LTV mortgage on a £200,000 home would mean you borrow the full value of the property, plus another £10,000 on top.
This was an extremely popular and widespread practice before the world financial crisis of 2008. However, today this type of product is a much rarer sight due to tighter banking regulations.
How do I lower my LTV?
You can lower your LTV by paying off your outstanding mortgage, either through monthly repayments and/or overpayments. Overpayments are when you pay back more than the agreed monthly repayment to pay off the debt faster.
The other way to lower your LTV is to increase the value of your property. This may happen naturally over time if you live in an area that’s becoming more desirable. You can also make improvements to your property to further raise its value.
By keeping your LTV as low as possible, you give yourself better options on initial mortgage products, and during refinancing. The lower your LTV, the better financial prospect you will appear to lenders, meaning that they are more likely to offer you their best deals.
Want to know more about how mortgages work? Check out our first-time buyer’s guide to getting a mortgage. Additionally, if you’re looking at a high LTV due to bad credit, we have a dedicated guide that can help you weigh your options.
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