What is Mortgage Loan to Value (LTV)?
You will often hear the term LTV (loan to value) ratio. This is the percentage of the property value you are loaned as a mortgage – in other words, the proportion you’re borrowing in relation to the property value (not to be consufused with the property price).
To calculate the loan to value (LTV), simply subtract your mortgage deposit as a percentage of the property value from 100%. So if you’ve got a £50,000 deposit on a £250,000 home, that’s a 20% deposit. This means that you owe 80% on the property price or value and this is the amount you need to get a mortgage on- so the LTV (Loan to Value) is 80%.The loan is 80% of the valiue of the home.
Mortgage lenders will only lend on a properties value. This means that if the property is overpriced you may have to put down a larger mortgage deposit to cover the deficit or risk losing your mortgage.
Loan to value when remortgaging
Similarly, if you’re remortgaging, and you own 40% of the value of your home, you’ll need a remortgage deal for the remaining 60% – this is your LTV.
LTVs are not just affected by the amount you put into a house as a mortgage deposit or the amount you own in a home through your equity but also by house values.
A practical example: let’s say when you first bought, you had a £50,000 deposit on a £500,000 house – that meant you owed £450,000 at the start. That’s an LTV of 90%.
After a few years you’ve paid a little off and now owe £250,000 on your mortgage.
You’re ready to remortgage and the house’s value is the same, so your LTV has become 50%.
However, if the house is now also worth more, say £750,000, this means you now have more equity in your house as the debt is still £250,000. Your equity is now £500,000 so your new loan to value (LTV) will be 33% (as it’s £250,000(debt) divided by £750,000 (house value) multiplied by 100).
This means you’ll be likely be able to get a much better remortgage deal.
However, if the house’s value had dropped to £400,000, you’d now owe more on your mortgage than the property is worth (negative equity) and you’d be unable to remortgage as your current mortgage is worth more than your house.
Loan to value rates are important as they determine what interest the mortgage lender charges you.
The more you borrow, the higher your mortgage interest rate is going to be. So borrowing less may be a good way to reduce yourmortgage loan to value.
Getting a lower Mortgage LTV
To get a good mortgage interest rate you will ideally need a 40% + mortgage deposit so you fall into the 60% loan to value (LTV). You may be able to get a good mortgage interest rate with a smaller mortgage deposit with some mortgage lenders.
What mortgage deposits gets you what:
5% gets you over the line but with high interest rates.
15% gives you a better chance of being accepted by most Lenders and rates will be better than a 5% mortgage deposit.
20% is typically the standard mortgage deposit requirement and rates will likely be better than a 15% mortgage deposit.
A 40% mortgage depsoit will give you a loan to value of 60% and will liekly get you very good mortgage rates.
So the more the deposit the better the rate usually
It may always be a good idea to wait a bit longer, negotiate a better house price or save more to get into a favourable LTV band if you possibly can.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.