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Do you find loan-to-value (LTV) puzzling? Are you confused about the difference between a 40% LTV and a 95% LTV? You’re not alone.
What is LTV?
LTV, or loan-to-value, is the percentage of the house price that you need to borrow. The lower the LTV, the more equity you have in your home (i.e. the more of your home you own).
LTV is one of the central factors in deciding not only if you can get a mortgage, but also which one you can take out.
How do you work out your LTV?
Take the amount you need to borrow, divide it by the value of the property and then multiply the result by 100 to get a percentage.
- Example one:
If you have a mortgage of £240,000 on a house that is worth £300,000, you have an LTV of 80%.
240,000 / 300,000 = 0.8
0.8 x 100 = 80% (and your deposit is 20%)
- Example two:
If you have a mortgage of £250,000 on a house that is worth £500,000. You have an LTV of 50%.
250,000 / 500,000 = 0.5
0.5 x 100 = 50% (and your deposit is 50%)
What is a high LTV?
The higher the LTV, the riskier you are to lenders, meaning it may be difficult to get the lowest interest rate on your mortgage in some circumstances.
You can avoid a high LTV by saving as much as you can for a deposit. When searching for a mortgage, you could be offered better terms because you're considered less of a risk. Although this might mean waiting a little bit longer to purchase your home, in the long run, it may be worth it.
What is a low LTV?
If you can afford a reasonable deposit, the LTV will be lower and will work out better in the long run, with both lower interest and overall capital value to pay off.
LTV and first-time buyers
First-time buyers with smaller deposits often have a high LTV. However, given the risk involved, many opt instead to go through affordable housing schemes such as Shared Ownership, which can offer better security under specific terms and conditions.
However, as a high LTV carries risk, first-time buyers need to weigh up whether it makes financial sense to step onto the property ladder with a minimum deposit, rather than continuing to grow their savings.
LTV and moving house
LTV is just as important if you are moving house or remortgaging. For example, if you have been paying off your mortgage for several years and the property market has been stable, or house prices have increased; your equity will have grown and you’ll own more of your home. This means you should be able to take out a mortgage with a better LTV and better conditions.
However, if the property market is unstable, it is worth considering if delaying a house move might make better financial sense. Although not ideal, this ensures you get the lowest LTV possible, saving you some money in the long run.
What next?
If you are looking for a mortgage or have further questions about LTV, please contact us or book an appointment. Alternatively, you can visit your local branch. We provide a tailored and individual service, and we are available for Saturday appointments.
YOUR MORTGAGE IS SECURED ON YOUR HOME. THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
